Daily Commentary - 20 June 2018
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USD / ZAR 13.6844 - EUR / ZAR 15.8285 - GBP / ZAR 18.0004 -
20 June : SA CPI Data - US MBA Mortgage Application ;Current Account Balance ; Existing Home Sales
21 June : SA Current Account Balance - UK BOE Rate Decision - US Jobless Claims - EC Consumer Confidence
22 June: EC Eurozone PMI - US PMI
Inflation will come into focus this today as Stats SA is scheduled to publish the May CPI data at 10h00. The effect of higher taxes implemented in April, including the 1pp hike in the VAT rate and higher fuel levies, caused a sharp increase in headline CPI inflation to 4.5% y/y during April from 3.8% in March. For May, we expect headline CPI inflation to remain at 4.5% (consensus: 4.6%). While fuel prices rose a further 3.4% m/m in May, base effects for this component mean that the y/y rise in fuel prices is only 0.2pp to 9.2%. Meanwhile, favourable effects on food prices are diminishing, but there is still very little upside pressure. As such, we forecast food and non-alcoholic beverages to rise marginally to 4.0% y/y in May from 3.9% in April. On core CPI, we expect a slightly downward move in May to 4.4% from 4.5% in April given the still limited demand-pull pressure on prices. Source Absa
However, the inflation outlook needs to be understood holistically. It is dangerous to look at inflation too mechanically, because history over the past 10 years shows that it need not function that way. There has been a decreasing response of inflation to the performance of the ZAR, the link to the fuel price notwithstanding and the main reason for that has been the weak growth in money supply and credit extension. Inflation can only manifest to its full potential in a monetary environment that allows it to. With growth in M3 and PSCE extremely subdued at levels of around 6% or softer, there is simply not enough air for inflation to breath and to rise as much as the mechanical calculations of inflation would suggest.
It seems like the ZAR just experienced a perfect storm where a number of factors aligned to drive the local currency weaker. Global trade wars that have driven equity markets weaker to intensify the element of risk aversion, coupled with a broader sell-off in more compromised emerging markets where the IIF has confirmed that foreigners withdrew some $5.5bn in the week just passed.
The EUR that was sold aggressively on indications that the ECB may be more conservative in their ending of QE, the USD regained some favour and commodity prices that have more recently collapsed, all conspiring to tilt the scales against the local unit.
That is all over and above suspected delta hedging on the part of the banks to cover hedges that were taken out against ZAR weakness months ago and there was simply too much for the ZAR to ignore. Aside from the very last point which may be captured in the ETM ZAR Sentiment Indicator, all other factors are offshore developments that have little to do with SA's economy or SA's economic or trade fundamentals.One can point to SA's sluggish growth, Ramaphoria which has all but evaporated, the recent protests around the country and Eskom's woes culminating in load-shedding and there is of course some validity in that, but it would be at the margin. It is only when one brings all these factors together that the argument for a weakerZAR makes sense.
It is mildly encouraging that the USD-ZAR backed away from its highs yesterday. Repeated efforts to sustain levels above 13.9000 failed and the pair settled at much lower levels. Today's price action will be key to establishing whether the pair has further to run to breach the 14.0000 handle or whether the move is in the process of petering out.
At some point, value will reassert itself and following their recent sell-off, emerging markets look well positioned to offer investors another round of value extraction. It is however a little too soon to tell and whilst a strong argument could be made for buying SA bonds at current levels, more proof is needed. Source Investec
Our range for the day : R 13.6000 – R14.000