Market reads China trade data as negative

• The USDZAR is holding at the 13.26/13.25 support level after having tested this level on Friday and again yesterday.

• Today, the focus will be China trade data, released this morning. The market seems to be interpreting the data as negative for especially commodities currencies, with the AUD and the NZD under pressure.

• Oil was the big mover yesterday, with both Brent and WTI declining more than 4%; Brent is back at $50/bbl and WTI at $47. Precious metals are also under some pressure.

• The outlook for commodities, a key cyclical underpin for the rand, appears weak.

• As for when the Fed might hike rates, Lael Brainard, a member of the Federal Reserve’s board of governors, made a speech in Washington in which she urged the Fed not to raise rates prematurely.

• No data releases are scheduled for this week. Attention is thus focused on the coal sector strike and the impending industrial action in the gold sector. As the coal sector strike continues this week, coal mining companies have increased their offer to coal workers.

International developments

The USDZAR is holding at the 13.26/13.25 support level after testing this level on Friday and again yesterday. With US bond markets closed yesterday, local markets were quiet. The bond market seems to be waiting for a move in the currency. With the positive momentum behind EM currencies seeming to fade, we expect bonds to remain quiet. The range for the rand is still 13.2500 – 13.5000.

The focus today is the Chinese trade data, released this morning. Overall, it seems that the market is interpreting the data as negative for especially commodities currencies, with the AUD and the NZD under pressure (the rand has also seen some selling this morning). Imports (in USD) for September contracted by -20.4% y/y from -13.8% y/y in August (driven largely by lower commodity prices), while exports for September contracted by -3.7% y/y from -5.5% y/y in August. The trade balance increased slightly from USD 60.24 billion in August to USD 60.34 billion in September. This was a fall in imports bigger than expected, which dominated over the increase in the trade balance and slower decline of exports.

As per our FIC market themes report dated 5 Oct’15, we note that our estimates for the rand points to the current “fair value” (at the end of September) to be closer to 13.00 against the dollar. We therefore are not completely surprised to see a pull-back in the USDZAR from close to 14.00 to below 13.50. But unless China provides large scale stimulus or the US Fed pushes back any rate hike expectation well into 2016, we still expect any strength in the rand to be temporary and believe that the rand is likely to trade closer to 14.00 against the dollar by year-end than 13.00. Neither of these two options seems on the cards right now and, as a result, from a strategic perspective we still prefer to approach the rand from the short-side (our G10 strategist Steve Barrow still expects a rate hike by the Fed in December).

Oil was the big mover yesterday, with Brent and WTI declining more than 4%, and Brent now back at $50/bbl and WTI at $47. Precious metals are also under some pressure. Gold and platinum, which both rallied since last week’s poor US NFP data, have run into resistance yesterday. Platinum, however, remains almost 10% above the $900/oz level it tested two weeks ago. We believe that the outlook for commodities – which is a key cyclical underpin for the rand – remains generally weak.

As for when the Fed might hike rates, Lael Brainard, a member of the Federal Reserve’s board of governors, made a speech in Washington in which she urged the Fed not to raise rates prematurely. She argued that the Fed should nurture the recovering US economy rather than prematurely take away the support that has been so important to growth. Brainard says that the inflation outlook is on the downside, and that there is every chance that the Fed will raise rates, only to have to cut them again at a future date as some other foreign banks have. She also put a lot of emphasis on the low level of labour force participation, which is at its lowest level since the 1970s. These comments come after vice chairman Stanley Ficsher said over the weekend that his view is that the economy is ready for a hike before the end of the year. It would appear there is no consensus among the members, but our view is still that the Fed will begin “lift-off” in December.

The Chinese trade data release has shaken the Asian markets which have generally had a poor day of trading. At the time of writing, only the Shenzhen Composite was up, by 0.6%, while the Shanghai Composite was down 0.2%, the Japanese Nikkei was down 1.1%, and the Hong Kong Hang Seng was down 0.4%.

Local developments

It is a quiet week on the local front, with no data releases scheduled this week. Attention is thus focused on the coal sector strike and the impending industrial action in the gold sector. As the coal sector strike continues this week, coal mining companies have increased their offer to coal workers. With 30,000 coal mineworkers affiliated to NUM currently on strike, the union has warned that prolonged strike action is likely to adversely impact the economy and has urged coal mining companies to offer better wages than the initial 8.5% (between R300 and R600) that they were offering. Workers are demanding a R1,000 increase. Coal mining companies have put forward an offer that is likely to see an end to the strike this week. On the table is a two-year wage deal, which would see the lowest earners receive an increase of between R750 and R1,000 per month in year one and a guaranteed increase of 7.5% in the second year. There would also be increases to the living out allowance and housing allowance, but these would vary across companies. Should the deal be accepted, it would put to bed Eskom’s supply concerns.

Markets

The rand strengthened on Monday, closing at 13.32, compared to Friday’s close of 13.35. The rand’s appreciation against the greenback occurred in line with dollar weakness against all of the major currencies; the dollar posted losses against the yen (-0.2%), the pound (0.2%) and marginally against the euro. The rand’s performance was stronger against the major crosses; the rand gained ground against the euro (-0.2%), the pound (-0.1%) and the yen (0.1%). The rand put in a mixed performance amongst the commodity currencies we monitor, and put in the third-best performance amongst EM currencies, only behind the THB and HUF. The rand traded between a low of USDZAR13.2520 and a high of USDZAR13.3777.

Metal prices were up further on Monday. Platinum and gold were up by 1.4% and 0.6% respectively, while copper was up by 0.4% on the day. Brent closed the day 5.3% lower, at $49.86/bbl. The developed world MSCI was up fractionally while the MSCI EM was up by 0.7% on Monday. The ALSI was down by 1.1% on the day. Non-residents were net sellers (-ZAR3.854 billion) of equities on the day. The EMBI spread narrowed on Monday by 5 bps, and SA’s 5yr CDS narrowed by 1 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 5.3%.

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