Rand Firms to 15.99 as Producer Inflation Slows to 5.7% and Bond Demand Hits a Twelve-Week High
The rand strengthened from around 16.09 to 15.99 against the dollar this week, touching 15.92 mid-week and extending a month-long recovery from levels near 16.80. Producer inflation slowed well beyond expectations to 5.7% as the fuel impulse drained away, auction cover jumped to a twelve-week high of 5.8 times, and cheaper crude alongside a dollar that could not get going did the rest. Here's our weekly wrap of what moved the market.
Global markets: a dollar going nowhere, cheaper crude and Jackson Hole ahead
For most of the week the outside world was doing emerging-market currencies a favour. The dollar could not get going despite occasional bids for safety, Treasury yields came down from the highs that had dominated the previous fortnight, and crude eased — between them lightening South Africa's import bill and improving the appetite for risk generally. Gold carried much of the load, sitting at three-month highs on Monday and holding above $4,600 an ounce by Tuesday, with platinum firm alongside it. When a currency's terms of trade hang about equally on the metals complex and the fuel account, having both move the right way at once is unusual, and it showed up in the crosses as clearly as it did against the dollar. The mood changed later in the week. A firmer July PCE reading lifted the dollar index back towards 99.13 on Thursday, and by Friday the currency had edged up again as positions were adjusted ahead of Jackson Hole and Federal Reserve Chair Kevin Warsh's appearance. Gold slipped, oil firmed and equities lost conviction, stripping out several of the supports that had carried the rand through the first half of the week. None of that broke the trend — the currency still ended some 4% above where it traded in late July — but it served as a reminder that this recovery rests largely on conditions abroad rather than anything repaired at home, and that positioning had become crowded enough for a hawkish surprise to hurt.
Inflation: producer prices slow to 5.7% as the fuel impulse drains away
Friday's producer price release was the domestic event of the week and it landed below a forecast that was already comfortable. Headline producer inflation dropped to 5.7% over twelve months from 7.5% in June, a shade under the 5.8% expected, with prices down 1.0% on the month. The arithmetic is not mysterious: petrol came off by R2.01 a litre and wholesale diesel by R3.59 over the period, reversing much of the cost shock the Gulf conflict delivered earlier in the year. Coming after July consumer inflation at 4.3%, the print firms up the disinflation case and improves the argument for holding duration. Where it gets interesting is the composition, because the message differs depending on which part of the market you sit in. Petroleum inflation is still high in level terms, but the impulse is draining away quickly as fuel costs settle, which limits what feeds through to consumer prices and ought to pull breakevens in, especially at the short end. Nominal bonds welcome that without qualification. Linkers do not: weaker accrual in the months ahead has to be paid for somewhere, and on that basis the I2031 needs a real yield generous enough to stand comparison with its nominal equivalent. The same tension showed in the week's auction results, and it is why a bond-friendly inflation number produced two quite different reactions across the curve.
Domestic backdrop: a project pipeline, offshore prospects and Durban's queue
Three domestic stories ran through the week and they did not all point the same way. Public Works and Infrastructure Minister Dean Macpherson is trying to turn a pipeline that has been discussed for years into something capital can actually be committed to: 263 strategic projects with a combined value close to R2 trillion, of which 37 worth around R69 billion have been finished over the past eighteen months, 82 worth R502.7 billion are being built, and R206 billion is still working through paperwork and tender. The heartening part is that the list has stopped being hypothetical. Work at municipal level could matter most, since water, sanitation, power distribution and roads both generate construction activity and cut what it costs firms to operate — a multiplier worth chasing, so long as the money ends up in assets that produce something rather than in a larger procurement exercise. Offshore energy is a similar story of potential waiting on execution. Petroleum Agency SA points to considerable prospectivity in the Orange and Outeniqua basins among others, Brulpadda and Luiperd established that a first-rate petroleum province sits off the south coast, and what Namibia has found next door in the same basin reinforces the geology. None of that promises barrels anyone can sell commercially, but it is ample reason to drill faster. The live question is whether the country will put terms in place that let private money find out what is down there, before uncertainty over the rules leaves the acreage unattractive to everyone. Durban Gateway Terminal supplied the counterexample. Ships are now taking over twelve days from arrival to departure, waiting close to seven days at anchor and around five alongside, and weekly volumes dropped 26% to 25,793 TEUs after the mid-August switch to ICTSI's Navis N4 system. It would be wrong to file this under failed privatisation, though: the congestion was building beforehand, on straddle carriers that were not available, plant that kept breaking, a crowded yard and poor coordination. The new system made an existing bottleneck worse rather than inventing one. The cyclical data stayed soft. The Reserve Bank's composite leading indicator dropped 1.4% on the month to 116.6 in June, a third straight fall that leaves it 3.6% below the March high, with the year-on-year gain cut from 4.2% in May to 2.1%. Five of the seven components available deteriorated, the biggest drags being softer dollar prices for the country's main exports and slower growth in real M1, with a flatter yield spread, fewer vehicle sales and weaker readings among trading partners adding to it. Friday closed on a more constructive structural note. The IDC wants to bring private shareholders onto its register while the state keeps its strategic hold, a considerable departure for a body wholly government-owned for 86 years, and one that would introduce something state balance sheets rarely carry: an outside price on risk. Shareholders want a return, ask awkward questions about the accounts and impose a cost when capital is wasted. That will not stop political interference, but it does make the bill for it visible. Set against a R4.7 billion loss at group level and a widening development mandate, broadening the ownership base reads less as privatisation than as an admission that the fiscus cannot keep underwriting every industrial ambition indefinitely.
Bonds: demand rebounds to a twelve-week high
Nominal paper had much the better week. Monday's look back at the latest inflation-linked sale was the softer of the two: bids came in at R1.70 billion against R2.81 billion previously as buyers grew warier of duration, though Treasury still sold its full R1 billion for a fourth auction running. Almost all the interest sat in the I2038, which pulled in R1.00 billion of bids and cleared 4.24%; the I2043 and the I2058 managed only R350 million each. Cover of 1.8, 1.8 and 1.4 times respectively says that real yields above 4% still find takers, but that those takers want their money back sooner while global volatility keeps duration risk elevated along the real curve. Tuesday's fixed-rate sale had more to prove. The week before had seen a strong bounce, bids climbing to R11.93 billion from R6.69 billion for cover averaging 4.7 times, but generous clearing levels and a shorter slate had flattered that result. This time Treasury offered R850 million each in the R2037, R2039 and R2042, taking buyers further out, and dropping the R2033 meant the sale would measure genuine appetite for duration rather than a flight to the front end. It cleared that bar comfortably. Bids reached R14.795 billion against R2.55 billion on offer, average cover rising to 5.8 times — the strongest in twelve weeks — as cheaper oil, a stronger rand and a generally weaker dollar relieved the external pressure that had been eating into the appeal of emerging-market debt through the previous month. That outcome improved the technical position going into Thursday's producer price release, and the downside surprise that followed only added to it. A rand under R16.00, US yields drifting lower and cover close to six times together make the most favourable combination local fixed income has seen since the quarter began.
USD-ZAR: the week in numbers
The week opened near 16.0850, the pair having dipped to test 16.0000 shortly beforehand, with the rand carried by strength across emerging markets, a soft dollar and gold at three-month highs, though positioning was already heavy after several weeks of gains. Support was bunched at 16.0600 and the 16.0500 Fibonacci projection with 15.9150 underneath, while 16.2000 and then 16.3800 capped the upside. By Tuesday USD-ZAR was at 16.0250, having traded below 16.00 the day before, the currency now the best part of a rand stronger than the 16.80 area it occupied a month earlier. Monday's low near 15.9650 became the level to watch: clearing it convincingly would open the way towards 15.60, with 16.2750 the barrier above. Wednesday delivered exactly that. The pair fell to about 15.92 having cut through 15.9650, which flipped into resistance and left the earlier low near 15.8250 as the next line of support. The crosses confirmed the move, EUR-ZAR around 18.57 and GBP-ZAR near 21.70, helped by cheaper crude easing the fuel bill and by softer US yields. Thursday brought the first pushback, the pair at 15.9500 as the dollar index climbed towards 99.13 on the firmer PCE print, though the rand stayed roughly 4% up on late July with solid gold and platinum, cheaper oil and heavy bond demand behind it; 15.8250 held below and 16.1175 above. Friday finished at about 15.9900, consolidating after a probe under 15.9000 and still a long way beneath the 16.25-plus levels of earlier in the month. The dollar picked up modestly before Jackson Hole while softer gold, firmer crude and uncertain equity markets took away some of the rand's support; EUR-ZAR at 18.60 and GBP-ZAR at 21.71 showed the currency still holding up well against the majors. The first support is 15.9650 and then the recent low at 15.8250, with 16.1175 likely to limit any bounce. The bias still points lower for the pair, but with Warsh yet to speak, consolidation looks more probable than another leg of rand strength.
Disclaimer: This commentary is provided for informational purposes only and does not constitute financial advice. Exchange rates are indicative and subject to change. Past performance is not indicative of future results. Please consult with a CAPTA Forex specialist before making any foreign exchange decisions.
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