Dollar bulls in charge ahead of busy week on the US data front

• The dollar is strong and EM currencies in general are on the back foot against the greenback. The rand is back above 12.00.

• China’s export data, released earlier this morning, was disappointing. Overall, the weaker Chinese data will likely be rand-negative and would be broadly in line with our view that the rand will remain on the back foot for most of 2015.

• Most major equity indices in the US and Europe ended Friday on a positive footing. This momentum is evident in most major Asia equity indices thisorning.

• The week is off to a very quiet start on the international data front. But, for the rest of the week, there’s a plethora of important data.

• From a strategic perspective, we maintain our bias towards rand weakness against the dollar into the approach of Fed “liftoff”, setting our mid-point forecast for Q3:15 at 12.35. In our opinion, bouts of rand strength below these mid-points offer an opportunity to add long dollar positions. Given our bias towards rand weakness against the dollar, we would not recommend going short dollar (long rand).

• We also remain of the opinion that the rand is most vulnerable on the USD axis while, with the prospect of continued monetary accommodation from the ECB and BoJ, the rand’s vulnerability on the EUR and JPY axes is greatly reduced.

• From a technical perspective, USDZAR support is at 11.9256, 11.8620 and 11.72. Resistance is at 12.1320 and 12.2709.

International developments

China’s export data, released earlier this morning, was disappointing. Exports (in dollar terms) declined by -15% y/y in March against Bloomberg expectations for a 9% y/y increase. The fall in exports came after the combined January and February data showed exports grew on average by 22.5% y/y in both months. While it is too soon to suggest that China’s exports are under substantially more pressure than previously thought, the number would certainly raise question around the country’s growth prospects, especially with China’s Q1:15 GDP figures due for release later this week (expectations are for a 7% y/y print). We also note that although the bulk of steel (and by extension iron ore) would be used in China’s construction sector, the decline in exports would be consistent with industrial commodity prices such as iron ore which has come under sustained pressure since especially the end of January.

China’s imports also continue to decline, registering a 12.7% y/y fall in March. Imports have no contracted for five consecutive months. This would be broadly in line with slower commodity demand growth. Overall, the weaker Chinese data has to be rand-negative and would be broadly in line with our view that the rand will remain on the back foot for most of 2015.

UK data out on Friday was a little disappointing. Industrial production rose 0.1% m/m, not the 0.3% m/m expected and manufacturing, while in line at 0.4% m/m did see a downward revision to January data (to -0.6% m/m from -0.5% m/m). Construction output was poor, falling -0.9% m/m against calls for a 2.2% m/m gain to follow the -2.5% m/m fall seen in January. Steve Barrow (our G10 FIC Strategist) that the weakness in construction could dent Q1:15 GDP a bit, but is still looking for something in the 0.5-0.6% region for Q1:15. But Steve points out that data does not matter right now as it's all about the election — and that means a weaker bias for the pound in his view — only possible exception here being against the euro.

The week’s off to a very quiet start on the international data front. But for the rest of the week there’s a plethora of important data. This includes US retail sales (Tuesday), Chinese Q1:15 GDP (Wednesday), and the CPI data for both the US (Friday) and UK (Tuesday). If all that’s not enough, there’s the ECB meeting, and a Bank of Canada rate decision (both on Wednesday). However, Steve notes that it seems that it will probably only be the US data that moves the market – if at all. For it is only the Fed that seems intent on taking its policy cue from the numbers. The ECB, for instance, is on QE autopilot while, in the UK, it’s all about the election, not the data.

Local developments

On the domestic front, it will be a quiet week. Stats SA releases the February retail sales data on Wednesday at 13:00. Bloomberg consensus expectations has pencilled in an improvement in sales. Retail sales growth is expected to have increased to 1.9% y/y in February from 1.7% y/y in January. M/m sales growth is expected to have swung into positive territory in February, to 1.2% from -0.1% in January. We expect lower levels of inflation to be supportive of retail sales growth over the year. However, the recovery is likely to be weakened by, amongst other things, electricity supply constraints, household deleveraging, and the delayed effect of a 75 bps interest rate hike in 2014.

Markets

The rand weakened on Friday, closing at 11.99, compared to Thursday’s close of 11.94. The rand’s depreciation against the greenback occurred in line with dollar strength against some of the major currencies; the dollar posted large gains against the pound (-0.6%), the euro (-0.5%), but lost against the yen (-0.3%). The rand gained ground against some of the major crosses; the yen (-0.7%) and marginally against the pound and the euro. The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the fourth-worst performance amongst the EM currencies, ahead of the BRL, MXN and the RUB. The rand traded between a low of USDZAR11.9250 and a high of USDZAR12.0592 intraday.

Commodity prices gained on Friday. Platinum and gold were up by 1.5% and 1.1% respectively, while copper was up by 0.7% on the day. The price of Brent increased on Friday, by 2.3%, to close higher at $57.87/bbl. Both the developed world MSCI and the MSCI EM were up on Friday, by 0.4% and 0.6% respectively on the day. The ALSI increased by 0.8% on the day. The EMBI spread narrowed by 1 bp, while SA’s 5yr CDS widened by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 3.9%.

Latest SA publications

Credit & Securitisation Monthly: Quarterly update: Q1 2015 by Steffen Kriel (10 April 2015)

SA FX Weekly: Dollar takes a breather by Marc Ground and Shireen Darmalingam (10 April 2015)

SA Macroeconomics: Economics Note: Trade balance & PSCE this week: Fitch on the sovereign; PPI declines; employment rises; & wage negotiations continue by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 March 2015)

SA Macroeconomics: Economics Note: Weaker growth, higher inflation, unchanged repo rate: Hawkish tone, but SARB's outlook still does not justify a hike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 March 2015)

SA Fixed Income MPC Comment: Defending not to hike by Asher Lipson and Walter de Wet (26 March 2015)

SA FI ALBI note: Auctions pressure the ALBI by Asher Lipson (25 March 2015)

SA FX Weekly: USDZAR trading now in a weaker range by Marc Ground and Shireen Darmalingam (24 March 2015)

SA Macroeconomics: Economics Note: The SARB to remain on hold: Manufacturing & mining contract in January; the Fed is no longer “patient”; and S&P downgrades Eskom to speculative grade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

Credit & Securitisation Weekly: S&P downgrades Eskom by Steffen Kriel and Varushka Singh (20 March 2015)

SA FI Weekly: Little local driver to bonds by Asher Lipson (20 March 2015)