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The SA Daily 16 January 2018

Rand supported by record high SA terms of trade but, ultimately, this may fade

  • We see the rand at 12.50 by year-end and 12.70 in 2019. Our rand forecasts are constructive, supported by benign global economic expectations, including reasonably strong economic growth and capital flows into EM remaining robust. Domestically, improved sentiment should also provide material support to the rand.
  • A risk to our rand forecast in 2018 is the relative movements in commodity prices that affect SA’s terms of trade. Oil prices overshooting forecasts is a particularly noteworthy risk to the rand via the impact on SA’s terms of trade (which are at near record high levels, providing important support to our expectation that the current account deficit will remain narrow).
  • One of SA’s key export destinations is China. Q4:17 GDP is due for release this week; the q/q GDP growth is expected to be flat at 1.7%; the concern here is that there could be a moderate slowdown in China’s growth in 2018. As such, we will monitor key Chinese data such as GDP growth closely given the importance for SA’s exports and, in turn, the terms of trade and exchange rate.

For chart of the day, please see PDF.

Daily commentary

Rand view: The rand is steady as markets await news on President Zuma. Also crucial for the rand this week will be the SARB MPC meeting. We believe that while the SARB is unlikely to cut rates, real rates at current levels will support the rand at the margin.

EM currencies are also benefiting from dollar weakness. The dollar continues to slide as investors price in the risk of tighter monetary policy by the BoJ and the ECB. Our G10 analyst is of the view that dollar weakness could continue for a few years. He also believes that the euro stands out as one currency that could gain the most from the dollar weakening.

SA today: mining production for November: Bloomberg consensus is for mining production to remain at similar levels to October, at 5.1% y/y.

The PBoC lifted its 63-day reverse repo rates this morning by 5 bps — in line with other interbank rates of 2.95%. The PBoC has in general leaned towards tighter monetary policy to rein in debt and to keep China competitive during Fed hiking cycles.

Commodities: Prices of precious and base metals started the week on the front-foot; these include gold at 4-month highs, palladium at all-time highs, and silver and platinum also increasing. This was mostly due to a softer dollar and a robust outlook for demand. This should support the rand at the margin. Oil pulled back from 2014 highs after a Baker Hughes report showed that US oil drilling rigs had increased.

Japan’s PPI for December has come in at 3.1% y/y, from 3.6% y/y, and slightly below expectations of 3.2% y/y. Domestic good prices, which is a component of the PPI and a loose tracker of CPI, increased — and this supports the BoJ’s upbeat expectations.

The BoJ’s Kuroda was upbeat about core inflation picking up to around 1%. He said that he was confident that the economy would recover to a point which helped inflation reach the bank’s 2% target. These comments sent the yen to 4-month highs against the dollar as markets speculate that a pullback in QE is to be signalled soon. The Japanese prime minister said that he didn’t see a problem with the currency being at these levels but that large swings in currencies are concerning.

On our radar

  • Fed speech: Market looking for clues on the number of interest rate hikes.
  • UK and Eurozone inflation for December: These numbers will be watched for clues to monetary policy by each respective country.
  • China’s Q4:17 GDP on Thursday: We monitor China’s growth for clues to any signs of a slowdown. This would pose a risk to SA’s exports and, potentially, the rand.
  • SARB MPC meeting on Thursday: In the very near term, the SARB might be reluctant to cut interest rates given the imminent fiscal and credit rating risks to the rand.

Latest research publications:

African Sovereign Eurobond Weekly: African Eurobonds: No changes in  overall composition of the portfolio by Dmitry Shishkin (15 January 2018)

SA Macroeconomics: Macro Weekly by Elna Moolman (15 January 2018)

Credit Weekly: Repo rate cuts expected by Robyn MacLennan, Steffen Kriel and Varushka Singh (12 January 2018)

SA Macroeconomics: 2018 SA economic outlook by Elna Moolman (11 January 2018)

SA Macroeconomics: Rand outlook by Elna Moolman (10 January 2018)

Credit Special Report: Eskom update by Steffen Kriel (10 January 2018)

SA Macroeconomics: Economic Insight by Elna Moolman (9 January 2018)

SA Economics: Dec vehicle sales -2.4% y/y by Thanda Sithole (9 January 2018)

African Sovereign Eurobond Weekly: African Eurobonds: Early gains in the New Year by Dmitry Shishkin (8 January 2018)

African Local Markets Monthly: Not many worries about FX by Phumelele Mbiyo (19 December 2017)

SA Macroeconomics: ANC National Conference by Elna Moolman (18 December 2017)

SA Macroeconomics: Macro Weekly by Elna Moolman and Thanda Sithole (15 December 2017)

Credit Weekly: Nersa publishes tariff decision by Robyn MacLennan, Steffen Kriel and Varushka Singh (15 December 2017)

SA Macroeconomics: 3Q17 CAD only 2.3% of GDP by Elna Moolman and Thanda Sithole (14 December 2017)

SA Macroeconomics: CPI for November 2017 by Elna Moolman (13 December 2017)

SA Macroeconomics: Economic Insight: Fiscal options: Can a wealth tax help? by Elna Moolman (11 December 2017)


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