ZAR cannot crack 14 ahead of US long weekend

• The dollar remains strong. On a trade-weighted basis, the dollar is back at levels seen in March this year due largely to euro weakness. The market is increasingly expecting the ECB to expand its QE programme when it meets next week. As our G10 analyst Steve Barrow points out, according to President Draghi, the ECB needs to lift inflation “quickly”.

• Bond markets have gone relatively quiet, with the UST10 year still around the 2.25%. Like the Fed fund futures market, the bond market appears to be comfortable with a Fed hike in December.

• While the rand weakened yesterday after failing to crack 14.00, we look for the currency to settle around 14.00–14.20. Risk appetite was marginally higher yesterday, with commodity prices rebounding a bit. We expect this to be largely short-covering ahead of the US long weekend.

• We expect a quiet end to the week before we head into a jam-packed first week of December, with not only the ECB meeting but also the US non-farm payrolls data on the agenda. And, of course, the week will end with both S&P and Fitch releasing their latest sovereign rating review of South Africa.

• Stats SA will release the PPI data for October today at 11h30. Consensus is for producer prices to have increased to 3.8% y/y in October from 3.6% y/y (higher-than-expected) in September. The ascent of PPI has been driven by a combination of a weaker exchange rate, as well as drought conditions, which is raising the price of both maize and wheat.

• The BER will release the Business Confidence Index for Q4:15 today at 12h00. Bloomberg consensus expects a pick-up in business confidence in Q4. The index is expected to have picked up to 42 pts in Q4:15 from 38 pts in Q3:15.

International developments

The dollar remains strong. On a trade-weighted basis, the dollar is back at levels seen in March this year largely due to euro weakness. The market is increasingly expecting the ECB to expand its QE programme when it meets next week. As our G10 analyst, Steve Barrow, points out, the ECB needs to lift inflation “quickly”, according to President Draghi. His speech last Friday left little doubt that this ‘speed’ will come from a rapid implementation of further monetary easing, probably in December. But speed in decision making is not the only factor here; there’s also the issue of implementing a policy that’s going to bring about the quickest rise in prices and, in our view, that can only mean one thing – a weaker euro. Although we expect the rand to remain weak against the euro over the next 12 months, we do not expect depreciation to be at a similar rate as for example against the dollar.

Bond markets have gone relatively quiet, with the UST10 year still at 2.25%. Like the Fed fund futures market, the bond market appears to be comfortable with a Fed hike in December.

While the rand weakened yesterday after failing to crack 14.00, we look for the currency to settle around 14.00–14.20. Risk appetite appears to be marginally higher as commodity prices rebounded a bit yesterday. We expect this to be largely short-covering ahead of the US long weekend. But equities have also performed better, with European equities ending higher across the board yesterday.

We expect a quiet end to the week before we head into a jam-packed first week of December, with not only the ECB meeting but also the US non-farm payrolls data on the menu. And of course the week ends with both S&P and Fitch releasing their latest sovereign rating review of South Africa.

Local developments

Stats SA will release the October PPI data today at 11h30. Consensus estimates are for producer prices to have increased to 3.8% y/y in October from 3.6% y/y (higher-than-expected) in September. The ascent of PPI has been driven by a combination of a weaker exchange rate, as well as local drought conditions, which is raising the price of both maize and wheat. This is expected to lead food CPI higher over the next 18 months (see report Food PPI begins its ascent, dated 25 Nov’15).

Food inflation in the CPI basket increased to 4.9% y/y in October from 4.4% y/y in September, driven mainly by higher prices of wheat and cereals, fish, oils and fats. In contrast, the prices of meat moderated in October. Our economics team has since revised their food inflation forecast higher for 2016, in line with the move in SAFEX wheat and yellow maize prices and ends next year at 9.3% versus their July forecast of 7.0% (see report CPI up 1ppt to 4.7% y/y, dated 18 Nov’15). The South African maize crop has contracted 27%y/y in 2015 due to the ongoing drought brought about by El Niño.

The BER will release the Business Confidence Index for Q4:15 today at 12h00. While the index is expected to remain below the 50-benchmark line, Bloomberg consensus estimates pencil in a pick-up in business confidence in Q4. The index is expected to have picked up to 42 pts in Q4:15 from 38 pts in Q3:15.

Markets

The rand weakened on Wednesday, closing at 14.13, compared to Tuesday’s close of 14.03. The rand’s appreciation against the greenback occurred in line with dollar strength against some of the major currencies; the dollar posted gains against the euro (-0.2%) and the yen (0.2%), but lost ground against the pound (0.3%). The rand’s performance was weaker against all of the major crosses; the rand lost ground against the pound (1.0%), the yen (-0.6%) and the euro (0.5%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-worst performance amongst EM currencies, only ahead the IDR and BRL. The rand traded between a low of USDZAR13.9980 and a high of USDZAR14.1670.

Metal prices were mixed on Wednesday. Copper and gold were down on Wednesday, by 1.3% and 0.4% respectively, while platinum was up by 0.2% on the day. Brent closed 0.1% higher, at $46.17/bbl. The developed world MSCI was up by 0.1% on Wednesday, while the MSCI EM was down by 0.4% on the day. The ALSI was up by 0.2% on Wednesday. The EMBI spread widened by 2 bps on Wednesday and SA’s 5yr CDS widened fractionally on the day. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 4.7%.

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