Standard Bank Research Team
Standard Bank
FX
The July Employment Situation Report and June PCE deflator data for the US will be released today. Payrolls growth is anticipated to continue apace, with consensus predicting a 230k gain. The unemployment rate is expected to hold steady at 6.1%. Headline PCE inflation is seen falling slightly to 1.7% y/y, from 1.8% y/y. The core inflation reading is also expected to come off slightly, from 1.5% y/y to 1.4% y/y. As we saw with last week’s consumer inflation data, a drop in inflation numbers could ease any lingering concerns that accelerating inflation might prompt the Fed to tighten policy sooner than currently anticipated, which could be to the benefit of risky assets.
Arguably the most important data flow this week from a currency market perspective was yesterday’s trade balance data. The preliminary trade balance narrowed significantly to -ZAR0.2 billion in June, from an upwardly revised -ZAR7.4 billion (-ZAR6.6 billion previously) in May. Consensus had the trade deficit for June narrowing only slightly to -ZAR6.3 billion. Exports increased by ZAR2.9 billion (3.7% m/m), driven primarily by a strong rebound in vehicles and transport equipment (ZAR2.6 billion increase, 42% m/m) as vehicle production at the Mercedes Benz factory ramped up after the retooling of the preceding few months. Precious metals exports also increased, by ZAR1.0 billion (10% m/m). There is potential for more upside in this category, given that the PGM strike was only resolved right at the end of June. A decline in imports also contributed significantly to the improvement in the overall trade balance, declining ZAR4.4 billion (-5.1% m/m). The main driver here was a marked decline in the imports of mineral products (-ZAR6.0 billion, -27% m/m), which more than offset increases in the imports of base metals (ZAR0.6 billion, 15% m/m), machinery and electronics (ZAR0.5 billion, 3% m/m), and vehicle and transport equipment (ZAR0.7 billion, 9% m/m). While the latest trade numbers are an encouraging sign that current account deficit compression could be occurring, the preliminary trade numbers for Q2:14 are slightly worse than the Q2:13 numbers (-ZAR20.02 billion and -ZAR19.51 billion respectively). Consequently, from a purely trade balance perspective, the current account as a percentage of GDP looks as though it could push above -6.0% in Q2:14 – the reading for Q2:13 was -6.2%. Renewed widening of the current account shortfall could once again cause the market to question whether the currency has done enough work to deliver the necessary current account compression that might be required by more challenging external financing conditions. Such uncertainty would leave the rand in a vulnerable position.
Local PPI numbers for June were published yesterday. Headline PPI inflation slowed for a second consecutive month to 8.1% y/y in June from 8.7% y/y in May. This was below Bloomberg consensus, which had the increase pegged at 8.4% y/y. The slowdown in the headline figure was aided by decelerating PPI inflation for food products, beverages and tobacco products (which has a weight of 36.8% in the overall PPI basket), which eased to 7.6% y/y in June from 7.8% y/y in May. PPI inflation for food continued to track softer maize prices, slowing to 8.6% y/y in June from 8.9% y/y in May. SBGS Economist Kim Silberman points out that maize prices typically feed into food PPI inflation with a lag of 3 months. Kim also notes that processed food CPI inflation lags food PPI inflation by a month, implying that food inflation in the consumer basket may have peaked in Q2:14. Since the lower-than-expected PPI inflation reading could be read as interest-rate-positive, it could also as a consequence be viewed as rand-negative.
The rand weakened further against the dollar yesterday, closing at USDZAR10.71, compared with Wednesday’s close of USDZAR10.66. Local currency depreciation occurred in tandem with a strong performance from the dollar against the major crosses. The rand depreciated alongside a weak performance from most of the commodity and all of the EM currencies we monitor for the purposes of this report. The dollar strengthened against the pound, the euro and the yen, with the biggest move seen against the pound (0.2%). All but one of the commodity currencies we monitor depreciated on the day – the exception was the NZD, which appreciated. As already mentioned all the EM currencies we monitor for the purposes of this report depreciated on the day. The rand was the worst performer in the commodity currencies category and took the middle ground in the EM currencies category. The rand traded between a low of USDZAR10.6496 and a high of USDZAR10.7371. Support from where the rand opened this morning sits at 10.5650, 10.4850, 10.4560 and 10.4025. Resistance levels sit at 10.7400 and 10.8500.
Turning to commodity prices, Platinum, gold and platinum copper fell by 1.5%, 1.1% and 0.5% respectively. Copper meanwhile rose by 0.1%. The ALSI fell by 0.8% and the EM MSCI fell by 1.2%. The EMBI spread widened by 7 bps and the SA CDS 5yr spread widened by 8 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose 27.0%.
Non-residents were net sellers of local equities (-ZAR1 308 million) and were mild net sellers of local bonds (-ZAR882 million) on the day. Selling was seen in the 3-7 (-ZAR840 million) and 1-3 (-ZAR185 million) year buckets. Buying was meanwhile seen in the 7-12 (ZAR110 million) and 12+ (ZAR34 million) year segment. Bond yields rose by between 1 bps (R214) and 2 bps (R203, R208 and R186) on the day. The 3x6, 6x9 and 12x15 FRAs rose by 1 bps, 2 bps and 5 bps respectively.
FI
SAGBs and the rand sold off yesterday; this was in line with the general EM trend, perhaps due to concerns ahead of US nonfarm payrolls out this afternoon. We expect the local and EM markets in general to remain at weaker levels ahead of today’s US nonfarm payrolls print. The release of SA’s significantly better than expected June trade balance yesterday (actual: -ZAR0.2bn; consensus: -ZAR6.3bn) saw a slight appreciation in the rand and strengthening in the bond market. However, this coincided with an EM selloff, which outpaced the moves stronger in the local market, which resulted in an overall selloff on the day. At today’s government ILB auction, NT is planning to raise ZAR800m across the I2025, I2038 and I2050.
SAGBs yields rose by between 0.50 of a bp and 3.00 bps across the curve, with the largest incremental weakening occurring at the belly of the curve. At the short-end, the yield on the R157 rose by 1.00 bp to 6.70% and the yield on the R203 and R204 rose by 1.50 bps and 1.00 bp to 7.12% and 7.42% respectively. The yield on the R2023 rose by the largest increment, of 3.00 bps to 8.08%, and the yield on the R186 rose by 2.00 bps to 8.30%. The R2030 and the R213 rose by 0.50 of a bp each on the day. At the extended-segment of the curve, the yields on the R2037, R214 and R2044 and all rose by 0.50 of bp each, and the R2048 rose by 1.00 bp to 9.07%. The US Treasury curve steepened slightly yesterday, as USTs delivered a mixed performance, with shorter-dated USTs strengthening, and longer-dated notes weakening. The yields on the 2yr and 5yr USTs fell by 2.75 bps and 1.47 bps respectively, to 0.53% and 1.75%. At the longer-end, the yields on the 10yr and 30yr notes rose by close to 0.10 of a bp and 0.41 of a bp, ending the US trading session at 2.56% and 3.32% respectively.
While the front-end of the local yield curve steepened yesterday, the belly and the back-end of the curve flattened marginally. At the front-end, the spread on the R186/R157 widened by 1.00 bp to 160.50 bps; the spread on the R213/R186 at the belly compressed by 1.50 bps, ending the day at 44.00 bps; and at the back-end, the spread on the R2048/R186 compressed by 1.00 bp to 77.00 bps. Total SAGB turnover fell to ZAR16.49bn yesterday from ZAR18.09bn on Wednesday. ZAR16.14bn of yesterday’s turnover was due to nominal SAGBs, and 26% of this turnover was recorded in the R186, 13% was recorded in the R207, 12% in the R2023 and 11% in the R209.
Non-residents were notable net sellers of nominal SAGBs yesterday, for a total of -ZAR882m. Both large inflows and outflows were recorded across individual bonds comprising the curve. At the front-end, outflows were recorded in the R157 (-ZAR186m) in the 1-3 year segment, the R204 (-ZAR569m) and R207 (-ZAR410m) in the 3-7 year segment, and at the longer-end, outflows were recorded in the R213 (-ZAR201m). Notable inflows were meanwhile seen in the R203 (+ZAR166m) in the 3-7 year segment, the R2023 (+ZAR110m) in the 7-12 year maturity category and in the R2037 (+ZAR156m) and R186 (+ZAR102m) in the 12+ year category.
SA outperformed the EM average FI market sell-off yesterday. 5yr and 10yr EM bond yields rose by a larger than the norm 6.19 bps and 7.47 bps on average on the day, probably on market concerns ahead of today’s US nonfarm payrolls print, and a general selloff that has continued on the back of the better than expected US Q2:14 GDP which was released on Wednesday. Hungary’s FI market recorded the worst performance across the EMs we cover, with the yields on the 5yr and 10yr notes rising by a relatively significant 23.00 bps and 31.00 bps respectively. Poland’s FI market recorded the second-worst performance, with the yield on the 5yr note rising by 15.40 bps and the 10yr note rising by 16.30 bps. Mexico came in third-worst, with its respective 5yr and 10yr notes rising by 8.40 bps and 8.30 bps. SA’s 5yr yield rose by 2.10 bps yesterday, while the 10yr yield rose by 2.90 bps, both outperforming the EM average. This was likely due to the better than expected June trade balance print which could have prevented as dramatic a sell-off compared with the other EMs that performed worse. India’s FI market recorded the only strengthening across the EMs we cover for the purposes of our reports. The 5yr note declined by a marginal 0.10 of a bp and the 10yr yield declined by 1.50 bps.
EM currencies sold off yesterday. The rand depreciated by 0.48% yesterday, performing better compared with other EMs which saw their currencies sell off by more on the day. The moves weaker were led by the Indian rupee, which depreciated by 0.84%, followed by a depreciation in the Hungarian forint of 0.81% and Brazilian real of 0.80%. Other EM currencies to depreciate on the day were the Thai bhat (0.73%), Polish zloty (0.56%), Mexican peso (0.48%), Turkish lira (0.42%) and the Russian ruble (0.20%).
The failure of the Republic of Argentina to make a USD539m interest payment on Wednesday, following a 30-day grace period (beginning on 30 June 2014) saw rating agencies Fitch and Moody’s take action on their respective ratings of the Argentinian sovereign. This follows S&P’s lowering of their unsolicited “long- and short-term foreign currency sovereign credit ratings on Argentina to selective default (‘SD’) from ‘CCC-/C’” on Wednesday. Fitch downgraded Argentina’s foreign currency (FC) issuer default rating (IDR) to RD (restricted default) from CC. Fitch downgraded the local currency (LC) IDR rating to CCC from B-, while the country ceiling was also downgraded to CCC from B-. Moody’s revised the outlook on Argentina’s sovereign ratings to negative, while affirming the current Caa1 issuer rating.
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