In today's market update, we discuss how the USD-ZAR extended its current upwards trend for the third day yesterday as positioning ahead of US CPI data due today continued to support the dollar.
4 reading min
10 Jun 2021
Mining production y/y: Apr
Analysis: The last round of data showed that mining production improved in May, swinging into expansion after contracting every month for a year. Mining output growth surged to 21.3%, its highest level in six years. This can be largely attributed to base effects, rising global commodity prices, and the government's gradual easing of lockdown restrictions. Expectations are for mining output growth to continue on the recovery path, buoyed by the still high commodity prices and strong global economic prospects. Note that Y/Y figures will once again be distorted heavily due to base effects for the April reading. Looking ahead, the sector will continue to benefit from a positive external environment, but there are local factors that continue to pose risks. The persistent structural challenges in SA, resumption of rolling power outages and weak fiscal dynamics that discourage investments are key risks that could drag on the mining sector's performance.
The USD-ZAR extended its current upwards trend for the third day yesterday as positioning ahead of US CPI data due today continued to support the dollar. Additionally, ahead of an ECB policy decision today, FX volatility has been relatively subdued this week, with few currency pairs making much progress. After enduring range-bound trade for most of the day, late afternoon moves ultimately saw the ZAR dip 1.10% against the USD to close at a one-week low of 13.7400/$.
However, the local unit was looking more resilient earlier in the day as it was encouraged by gains in domestic equity markets, which took impetus from positive business confidence data yesterday.
The SACCI business confidence index (BCI) rose to 97 in May from 94 in April, marking the highest level since 2018. Also released yesterday, the quarterly BER BCI rose higher than expected, coming in at the 50-neutral mark in Q2 from 35 in the first quarter of 2021. This was the highest reading for the latter index since Q4 2014, with confidence in all five sectors making up the index rising and notably sharp rebounds occurring in the manufacturing, retail trade, and motor trade sectors.
For the day ahead, insight into the productive side of the economy will come from mining and manufacturing production statistics for April. Base effects aside, the mining sector will continue to benefit from a favourable external environment, but overall growth in both sectors will continue to be held back by rolling power outages which have not improved through Q2. Current account data for Q1 will also be available this morning, with the surplus expected to increase further due to support from the trade account which remains near record highs.
At this stage of the rate cycle, the open question is whether economic growth is poised for a rebound. It would allow retailers some room to pass through higher costs to clientele, raising inflationary pressures in what could become a concern to the SARB. Yesterday saw Business Confidence data came in a lot stronger than it has been in recent months, suggesting that businesses could be becoming a little more comfortable in the uncertain COVID-dominated regulations space.
Both the SACCI and BER data series reflect improving conditions. According to the BER index the number of respondents satisfied with prevailing conditions now equals those that are unsatisfied. The outcome mimics what is going on in the equity markets, where expectations for divergent performances are reflected in equity prices, suggesting that a "K-shaped recovery" is underway. Confidence rebounded sharply in the manufacturing, retail trade, and motor trade sectors. By contrast, sentiment among building contractors and the wholesale trade sector improved only marginally. This divergence suggests that the argument for rising inflation is somewhat diminished, particularly in an environment of low credit and money supply growth.
Although sentiment amongst business players has improved, businesses continue to face risks that could keep the index from rising any further. These include the absence of structural fiscal reforms, a slow rollout of vaccines, rising unemployment, and the emergence of fresh load-shedding as winter rolls in. SA's third wave of COVID infections could also keep business owners cautious. Even with the current elevated levels of business confidence, economic growth is likely to remain weak due to these developments.
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