Forex Daily Market - The ZAR treaded water yesterday

In today's market update, the ZAR treaded water yesterday not far from last week’s close, as emerging market currencies were a mixed bag and the US dollar flat amid US holiday-thinned trade, resulting in limited opportunities in FX markets.

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AU RBA rate decision: Jul 6

Expected: 0.10%

Prior: 0.10%


Analysis: At its last meeting, the RBA chose to maintain its current policy rate and three-year target bond yield at 0.10% which it has held since November 2020. The central bank noted its commitment to maintaining accommodative monetary policy until inflation is sustainably in the 2-3% range and is placing a high priority on a return to full employment. However, it was also noted that economic recovery is progressing faster than expected, with the RBA keeping a watchful eye on a buoyant property market due to record low rates. Nevertheless, with inflation coming in at just 1.1% in the first quarter, we will unlikely see any mention of rate hikes in the coming months. The July meeting will assess whether to roll over its yield target bond to the November 2024 maturity from the April 2024 maturing bond, while at the same time the RBA will need to decide whether to extend its bond-buying program. With further outbreaks on the virus front, triggering lockdown restrictions, the RBA may thus continue to err on the dovish side.


The ZAR treaded water yesterday not far from last week’s close, as emerging market currencies were a mixed bag and the US dollar flat amid US holiday-thinned trade, resulting in limited opportunities in FX markets. On the back of a US payrolls report Friday, which did little to speed up Fed tapering expectations, the ZAR traded positively against the USD initially. Yet, domestic political developments and the continuation of the second week of level 4 lockdown restrictions weighed on the currency and local stock markets. As a result, gains were pared and the local unit closed flat against the USD at 14.2600/$.


Domestic markets shrugged off the economy-wide Standard Bank PMI earlier in the day as it left more to be desired despite the headline gauge holding above the 50-neutral mark for the ninth consecutive month. Specifically, the PMI fell for the second month to 51 from 53.2 in May as demand conditions were hampered in June by the reintroduction of harsher lockdown restrictions. With this marking the second consecutive month of stalling growth, it also suggests current lockdown restrictions added more to the already underway trend. While current limitations are not as economically damaging as those seen last year, there are still clear risks of the private sector falling back into contractionary territory, especially given the fragile business environment constrained by long-term structural challenges. Should these risks play out, SA may ultimately fall behind on growth projections and lag other emerging and developed nations as the global economic recovery progresses. While this could still keep domestic trade dynamics supportive for the ZAR in the near term, the longer-term implications will be on the economy’s readiness for rate hikes, both domestically and abroad.


National Treasury data flags approximately R6.2bn in foreign outflows in June, with the outflows primarily concentrated in the front-end to the belly of the curve. Note that this is well below the R10.6bn that JSE figures estimate outflows at, while a closer look at the individual bond data shows a weak correlation with official NT figures. The NT data show that the largest outflows were recorded for the R2030 at R9.3bn on the month, while the R2023 experienced foreign selling of R5.4bn. This R2023 outflow seems to have been driven by a switch auction, as the total issuance of the R2023 fell by nearly R7bn on the month.


However, the outflows were partially offset by an inflow of R3.1bn into the low coupon and suitably discounted R213, and a further R6.6bn into bonds with higher maturity in the 2035-2048 region of the curve. This suggests that foreign investors are trading out of shorter-term risk exposures, while the R2030 has been the recipient of recent inflows and is perhaps most exposed to a deterioration in sentiment to SA. This explains the upside pressure that was seen on the front end of the curve, as tightening monetary policy expectations are priced into the curve. Equity outflows were far more brutal with the JSE data signalling that R24.6bn ($1.4bn) worth of equities were sold in June by foreigners. These equity outflows were primarily driven by the selling of China-exposed Naspers of approximately R13.5bn. At the same time, mining lost a little over R4bn in foreign equity capital and banks R1.9bn. Weak macroeconomic fundamentals remain a bugbear in SA, and this will be reducing the value proposition of SA equity.

Note that the ferocity of the outflows seems to have reduced heading into July with equity outflows according to JSE data, meaning that SA asset prices could have reached a state of calm now that Q2 has come to a close. This could have been profit-taking after all.

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