Standard Bank Research Team
Standard Bank
FX
SARB gold and foreign exchange reserves numbers for June were published earlier today. As we anticipated, valuation effects were net-positive for end-June readings, as the impact of a stronger gold price on gold holdings (from USD5.038 billion to USD5.284 billion) was marginally augmented by the positive impact of a weaker dollar on the value of non-dollar foreign exchange holdings. However, a redemption of a foreign-currency sovereign bond (of c.USD1 billion) in early June led to a drawdown in foreign exchange reserves, which saw gross reserves fall to USD48.6 billion from USD49.2 billion. Consensus had the June number rising slightly to USD49.3 billion, with most estimates seemed to have overlooked the bond redemption. Net reserves, or the international liquidity position of the SARB, climbed to USD44.8 billion from USD44.5 billion in May.
Mining and manufacturing production data for May will be published on Thursday (10 July). Consensus (Bloomberg) forecasts the contraction in mining output to resume; -4.9% y/y from +0.2% y/y in April. This is reflective of the y/y change coming off a very strong base; in May 2013, mining output expanded by 6.1% m/m on a seasonally adjusted basis. Pessimism regarding the outlook for mining output numbers is also likely owing to anticipated impacts of the five-month long PGM industry strike. The currency market consequences of mining output results should be interpreted mainly via what they signal regarding the current account balance, and also via their economic growth and interest rate consequences. On a net basis, weak mining output numbers should be read as rand-negative.
Y/Y growth of manufacturing will be worked off a low base in May, suggesting a possible marked acceleration against the y/y reading of -1.5% for April. In April this year, base effects were extremely unfavourable as there was a 7.5% m/m, seasonally adjusted, increase recorded in April 2013. Consensus pins the outcome at -1.2% y/y. Market participants will be looking to measures of local manufacturing sector performance for indications as to what extent local industry has gained any competitive edge from material and sustained cheapening of the currency over the past 18 months.
The rand weakened against the dollar on Friday, closing at USDZAR10.76, compared with Thursday’s close of USDZAR10.75. Local currency depreciation occurred alongside a mixed performance from the dollar against the major crosses. The rand depreciated into a mostly weaker performance from the commodity currencies and EM currencies we monitor for the purposes of this report. The dollar weakened against the euro and yen, while strengthening against the pound. All but one of the commodity currencies we monitor, depreciated on the day, the exception was the AUD which appreciated. Three of the nine EM currencies we monitor for the purposes of this report – namely the IDR, the THB and the INR – appreciated on the day. The remaining EM currencies we monitor depreciated. The rand took up the middle position in the commodity currencies category and depreciated the least amongst the EM currencies which weakened (beaten only by the IDR, the THB and the INR). The rand traded between a low of USDZAR10.7176 and a high of USDZAR10.7662. Support from where the rand opened this morning sits at 10.7085, 10.6800, 10.6250, 10.5800, 10.5200 and 10.4800. Resistance levels sit at 10.7800, 10.8200, 10.9000, 10.9400 and 11.0000.
Turning to commodity prices, copper, Brent and platinum fell by 0.4%, 0.3% and 0.2% respectively. Gold rose by 0.1%. The ALSI rose by 0.3% and the EM MSCI rose by 0.02%. The EMBI spread remained unchanged due to the US public holiday on Friday, while the SA CDS 5yr spread widened by 0.8 of a bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, remained unchanged due to the US public holiday on Friday.
Non-residents were mild net sellers of local equities (-ZAR300 million) but were meaningful net buyers of local bonds (ZAR961 million). Buying was seen in the 12+ (ZAR791 million), 3-7 (ZAR164 million), 7-12 (ZAR5million) and 1-3 (ZAR1 million) year buckets. Bond yields fell on the day by between 1 bp (R208) and 2 bps (R203, R186 and R214). The 3x6 FRA fell by 2 bps, and the 6x9 and 12x15 FRAs both fell by 1 bp.
In local labour news, with regard to the strike in the metals and engineering sector, Mokgadi Pela (Labour Minister Mildred Oliphant's spokesperson) said yesterday that, "There are still sticky issues around labour broking, the youth wage subsidy, and housing, and the parties are being urged to resolve those issues … As you know, we met employers on Friday afternoon, and we met with Numsa in the evening. All I can tell you is that in terms of wage percentages the union is closer than ever before to the amount they wanted, but I can't tell you what the amount is." Numsa downed tools for a double-digit wage increase on 1 July (last week Tuesday).
Today the international calendar is fairly light. The main event this week though will likely be the release (on Wednesday) of the minutes of the 17 to 18 June FOMC meeting. There has been some speculation that the minutes could prove somewhat more hawkish than the interpretation given by Fed Chair Yellen in the post-meeting press conference. Steve Barrow (our G10 Strategist) thinks that perhaps due to this, the shock value may be limited, although he does add that with volatility so low in most markets and the reach-for-yield so prevalent, the markets could prove very vulnerable to even the slightest of nuanced changes from the Fed. We also have the BoE monetary policy meeting this week (announcement on Thursday). Given the strength of the UK recovery, the BoE’s next move is likely tightening, although it would appear that we are still some way off from this – Steve doesn’t expect the first hike until Q1:15. Nevertheless, this should lend the pound a bias towards strength, especially against the likes of the euro and the yen, since the ECB and BoJ are still far from moving towards policy normalisation.
FI
Friday’s government ILB auction of the R212, I2038 and I2050 saw a week-on-week decline in total bids, to ZAR1.20bn from ZAR1.42bn at the previous week’s offering, resulting in a bid/cover ratio of 1.5x at Friday’s auction (previous week: 1.8x). Pricing was uncompetitive in the I2038, which cleared at 1.82%, 0.50 of a bp higher compared with the previous day’s closing MTM level, while it cleared in line with its previous auction yield. Both the R212 and I2050 cleared in line with Thursday’s closing MTM levels, at 1.49% and 1.985% respectively. Market participation remained subdued, at 15 participants, against the prior week’s 14 participants. The I2050 attracted the largest proportion of the bid volumes, with 48% of total bids going to the bond, followed by the I2038, which received 33% of bids, while the R212 received the remaining 18%. The R212, with a 2022 maturity, was last auctioned in March 2013.
The local FI market strengthened overall as yields fell by between 1.00 bp and 2.00 bps across the local yield curve on Friday; this was despite a weaker local currency, and the US Independence Day holiday on Friday (in which the US bond market was closed); however, this was in line with a general strengthening in EM FI markets. The support to SAGBs likely stemmed from non-resident purchases on the day, which was recorded at +ZAR961m. At the short-end, the yield on the R157 fell by 2.00 bps to 6.73%. The yield on the R186 also fell by 2.00 bps to 8.38%. The yield on the longest-dated R2048 fell by 1.50 bps to 9.08%, and the slightly shorter-dated R214 (2041 maturity), fell by 2.00 bps to 9.03%. The yield on the R208 fell by the smallest increment, of 1.00 bp, to 8.00%. Week-on-week, yields across the SAGB curve rose by between 1.50 bps and 8.50 bps in a bear curve flattening of the local yield curve. Week-on-week, the yield on the R186 rose by the largest increment (of 8.50 bps), while the R157 rose by a more marginal 5.00 bps. The R2048 was the exception, with the yield remaining unchanged from the previous week. USDZAR depreciated on Friday, by 1c on the day, to USDZAR10.76. Week-on-week, USDZAR depreciated by close to 17c.
The yield curve steepened marginally on Friday; at the front-end and at the belly, the spreads on the R186/R157 and the R213/R186 remained unchanged, ending the day at spreads of 165.00 bps and 46.00 bps respectively. However, the spread on the R2048/R186 at the back-end widened by a marginal 0.50 of a bp to 70.00 bps. Total SAGB turnover fell to ZAR9.67bn on Friday, from ZAR15.08bn on Thursday. ZAR6.82bn of Friday’s turnover was due to nominal SAGBs, and a relatively significant ZAR2.85bn was in government ILBs. This can be attributed to both Friday’s auction, as well as a general pick up in ILB turnover on the day. A significant proportion of Friday’s nominal turnover occurred in the R186 (40%), with notable turnover also recorded in the R208 (18%).
Non-residents were substantial net buyers of nominal SAGBs on Friday, for a total of +ZAR961m. Foreigners purchased +ZAR791m in the 12+ year segment, due primarily to inflows into the R186 (+ZAR958m), which was partially offset by net selling in the R213 (-ZAR147m). The 3-7 year segment recorded net inflows of +ZAR164m, due to net buying in the R203 (+ZAR305m) and the R208 (+ZAR80m); this was offset by net selling in the R207 (-ZAR195m).
EM FI markets we monitor for the purposes of our reports strengthened overall on Friday. 5yr EM bond yields fell by 1.37 bps on average, and 10yr yields fell by 1.46 bps on average. SA’s FI market delivered a middle of the pack performance, and underperformed relative to the EM average; the 5yr yield fell by 0.60 of a bp and the 10yr yield fell by 1.00 bp. Poland’s FI market recorded the best performance in the 5yr and 10yr spaces, with the yields falling by 5.80 bps and 5.30 bps respectively. Turkey’s FI market recorded the second-best performance in the 5yr and 10yr spaces as the yields fell by 3.00 bps each. Indonesia recorded the worst performance in the 5yr space on Friday, with the yield rising by 0.60 of a bp, while India recorded the worst performance in the 10yr space, with the yield also rising by 0.60 of a bp.
EM currency markets delivered a weak performance on Friday, with most of the currencies we monitor, depreciating on the day. The rand depreciated by a marginal 0.10% compared with larger moves from other EM currencies. The Russian ruble recorded the worst performance, depreciating by 0.59% on Friday, followed by Hungary (0.28%), Poland (0.28%), Turkey (0.24%), Mexico (0.15%) and Brazil (0.14%). In contrast, the Indonesian rupiah appreciated by 0.38%. We expect some volatility in the Indonesian rupiah in the run-up to the country’s presidential election on Wednesday this week.
Latest SA publications
FX Weekly: A commodity currency by Marc Ground and Varushka Singh (4 July 2014)
Credit & Securitisation Monthly: Quarterly update: Q2 2014 by Robyn MacLennan and Steffen Kriel (4 July 2014)
Credit & Securitisation Flash Note: Transnet SOC Ltd by Robyn MacLennan and Steffen Kriel (1 July 2014)
Credit & Securitisation Weekly: Eskom rating concerns by Robyn MacLennan and Steffen Kriel (27 June 2014)
Fixed Income Weekly: Updating our curve views by Asher Lipson and Kuvasha Naidoo (20 June 2014)
FI Rating Comment: S&P downgrades SA, but Outlook to stable Asher Lipson and Kuvasha Naidoo (13 June 2014)
FI Rating Comment SA Rating comment: Fitch revises SA Outlook to Negative Asher Lipson and Kuvasha Naidoo (13 June 2014)
Fixed Income Special Report: SA's ratings - sentiment not so sweet by Asher Lipson and Kuvasha Naidoo (5 June 2014)
Fixed Income Update: Pricing the new R2032 by Asher Lipson and Kuvasha Naidoo (4 June 2014)
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