The SA Daily - Rand still volatile

• The rand traded as weak as 12.28 against the dollar yesterday. Although the euro is still well off the lows seen in March against the dollar (at 1.0460), the dollar has been strengthening steadily against the euro since mid-May.

• Talks between Greece and the Troika have still not been concluded. It looks as if we will see another week of talks on a knife-edge, which could weigh on the euro. However, as we have said before, we think it most likely that a deal is done eventually, which should provide the euro with some relief.

• We believe that the Greek crisis is not the driver of the euro/dollar and that the euro/dollar weakness won’t be changed by the outcome of Greek negotiations with creditors.

• We continue to pin the mid-point of our anticipated USDZAR trading range at 12.10 for Q2:15. We maintain our bias towards rand weakness against the dollar into the approach of Fed “lift-off” (which we put in September), setting our mid-point forecast for Q3:15 at 12.35.

• Yesterday’s release of the Kagiso/BER PMI data surprised on the upside, while the Naamsa vehicle sales data surprised on the downside.

• The PMI is now above the 50-benchmark line, at 50.8 pts in May, from 45.4 pts in April. The BER noted that respondents to the survey have indicated that rand weakness was starting to benefit competiveness in international markets.

• The Naamsa vehicle sales data released yesterday saw vehicle sales growth contract by 3.2% y/y in May from a contraction of 3.3% y/y in April. The softening in demand for new vehicles, together with the continued electricity supply constraints and subdued consumer and business confidence, does not bode well for the vehicle market in H2:15.

International developments

The rand traded as weak as 12.28 against the dollar yesterday. Although the euro is still well off the lows seen in March against the dollar (at 1.0460), the dollar has been strengthening steadily against the euro since mid-May and is once again below the 1.10 level, while sterling has rallied since the Conservative election victory on May 7th.

As our G10 strategist pointed out yesterday, a Greek tragedy has been unfolding before our eyes over the past five years. Talks between Greece and the Troika have still not been concluded. The Greek side had said that they wanted to get a deal done by Sunday but now some members, such as interior minister Voutsis, say that a deal needs to be done this week. This is in spite of the fact that the government says that it can make a €300bn payment to the IMF that’s due by Friday June 5th. Nonetheless, it looks as if we will see another week where the talks appear on a knife-edge, which could possibly weigh on the euro as a result. However, as we have said before, we think it most likely that a deal is done eventually, which should provide the euro with some minor relief.

Nonetheless, our G10 Strategist further points out that the Greek crisis is not the driver of the euro/dollar and that the euro/dollar weakness won’t be changed by the outcome of Greek negotiations with creditors. We believe that the euro/dollar will fall over the longer term on the back of the ECB pumping out liquidity at a faster pace than the Fed.

There isn’t much on the US data front today. The factory orders data is due for release today. On a m/m basis, factory orders are expected to have contracted 0.1% in April, from growth of 2.1% in March; this follows improved data over the past few weeks that has lent support to the dollar.

We continue to pin the mid-point of our anticipated USDZAR trading range at 12.10 for Q2:15. We maintain our bias towards rand weakness against the dollar into the approach of Fed “lift-off” (which we put in September), setting our mid-point forecast for Q3:15 at 12.35.

Local developments

Yesterday’s release of the Kagiso/BER PMI data surprised on the upside, while the Naamsa vehicle sales data surprised on the downside. The PMI data reflected that the manufacturing sector is expanding. The index clipped above the 50-benchmark line to 50.8 pts in May from 45.4 pts in April and against Bloomberg expectations of a slight pick-up to 46.7 pts. Evidence, however, suggests that despite the improvement in May, the manufacturing sector will remain constrained in Q2:15. While the leading PMI measure recovered significantly in May, it remains in contraction and the 3mma is trending downwards. The BER noted that respondents to the survey have indicated that rand weakness was starting to benefit competiveness in international markets.

The main drivers of the 5.4 pts increase in the headline number emanated from the new sales orders, which increased to 52.2 pts in May from 42.3 pts in April. The business activity sub-component also increased and edged closer to the 50-benchmark line to 49.6 pts in May from 40.6 pts in April, while inventories and suppliers’ performance reflected moderate gains in May. The employment index remained unchanged between April and May.

A bright spot for the manufacturing sector, however, comes from the latest two mining production data prints; mining rebounded to 7.5% y/y in February from a contraction of 2.3% in January, and grew sharply, at 18.8% y/y in March. If mining production continues to grow at a steady pace, this could see the manufacturing sector pick up.

The Naamsa vehicle sales data released yesterday saw vehicle sales growth contract by 3.2% y/y in May from a contraction of 3.3% y/y in April and against Bloomberg expectations of a slight improvement to -2.4% y/y. New passenger car sales slumped in May. The softening in demand for new vehicles, together with the continued electricity supply constraints and subdued consumer and business confidence, does not bode well for the vehicle market in H2:15. In addition, higher personal tax rates are also starting to impact consumers’ pockets.

Markets

The rand weakened on Monday, closing at 12.27, compared to Friday’s close of 12.15. The rand’s depreciation against the greenback occurred in line with dollar strength against most of the major currencies; the dollar posted gains against the pound (-0.6%), the euro (-0.6%) and the yen (0.5%). The rand lost ground against all of the major crosses: the euro (0.3%), the pound (0.3%) and the yen (-0.3%). The rand put in a second-worst performance amongst both the commodity currencies we monitor for purposes of this report as well as EM currencies, only ahead of the NOK (commodities) and RUB (EMs). The rand traded between a low of USDZAR12.1469 and a high of USDZAR12.2896.

Commodity prices were mixed on Monday. Platinum and gold were down on Monday, by 0.9% and 0.1% respectively, while copper was up by 0.2% on the day. The price of Brent closed 1.0% lower, at $64.88/bbl. Both the developed world MSCI and the MSCI EM were down on Monday, both by 0.1%. The ALSI was down by 0.4% on the day. Non-residents were net buyers of equities (ZAR634 million) on Monday. The EMBI spread narrowed by 2 bps, while SA’s 5yr CDS widened by 4 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.9%.

Latest SA publications

SA Macroeconomics: Manufacturing PMI rises unexpectedly to 50.8: According the BER, weak rand improved SA's competitiveness by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 June 2015)

SA Macroeconomics: Fitch is likely to downgrade SA: EMs sold off in May & will continue to be directed by US data by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 June 2015)

SA FIC Weekly: Ratings, and what markets are pricing in by Walter de Wet and Shireen Darmalingam (1 June 2015)

SA Macroeconomics: April Trade deficit –R2.5Bn, far narrower than in 2014 & 2013 : Fall in imports not just an oil story by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 May 2015)

Credit & Securitisation Weekly: Update on African Bank restructuring by Steffen Kriel and Varushka Singh (29 May 2015)

SA Macroeconomics: Unemployment rises to 26.4%: Trade sheds 201k jobs; finance adds 156k jobs by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: Q1 GDP slows to 1.3% q/q: Is SA in a downward phase of the business cycle? by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: GDP to slow to 1.0% q/q and the trade deficit to widen: Details of public sector's wage deal indicate fiscal slippage by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 May 2015)

SA FIC Weekly: Public sector wages: the real deal not all that bond-positive by Walter de Wet and Shireen Darmalingam (25 May 2015)

Credit & Securitisation Weekly: Clarification on e-tolls by Steffen Kriel and Varushka Singh (22 May 2015)

SA FIC: MPC Comment: The MPC “stands ready to act when appropriate” by Walter de Wet (22 May 2015)