Forex Daily Market - The USD-ZAR closed higher for the second day

In today's market update, the USD-ZAR closed higher for the second day this week amid continued domestic social unrest, while a higher than expected US inflation print bolstered the USD.

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TODAY'S TALKING POINTS

 

Retail sales m/m: May

Expected: 1.00%

Prior: -0.77%

 

Analysis: Retail sales growth rebounded to some degree in April, recording a smaller decline of 0.77% m/m compared to the sharp 4.52% drop in the month prior. Despite the improvement, retail sales have contracted in four out of the last five months this year, which signals that domestic demand dynamics remain relatively weak. Looking ahead, the risk to the sector remains tilted to the downside. The re-imposition of tighter restrictions due to the third wave of COVID-19 virus, weak labour dynamics, absence of reforms and depressed consumer and business confidence are all factors that will continue to weigh on the retail sector going forward. Rising administered costs and surging fuel bills, meanwhile, will also pressure disposables incomes and weigh heavily on the sector.

RAND UPDATE

The USD-ZAR closed higher for the second day this week amid continued domestic social unrest, while a higher than expected US inflation print bolstered the USD. The ZAR hit a three-month low against the dollar as it broke through the 14.5000/$ key support level, while domestic stocks and bonds also suffered. The local unit ended London trading hours at 14.6450/$, 1.60% weaker than the prior day’s close, with pressure remaining to the downside overnight as riots continue and death tolls rise.

 

In terms of domestic data, on the back of a weak manufacturing production print the previous day, mining production also weighed on the ZAR as the data showed a decline in May. Specifically, output remained higher year on year due to last year’s limited productive capacity amid the first round of lockdown restrictions. However, on a monthly basis, output fell by 3.5% in a month of relatively eased restrictions to productivity. These recent prints highlight the risk of a sluggish recovery, one which may take longer than expected. Given high commodity prices though, the outlook is somewhat better than the data may suggest, but this is unlikely to boost business confidence sufficiently as current lockdown restrictions and domestic unrest is likely to hold back much-needed investment going forward.

 

In the spot markets, the US dollar has remained buoyed by the market’s reaction to the highest headline inflation print in 13 years, which raises questions over the Fed’s assumptions that inflation will prove temporary. The ZAR, meanwhile, has continued to underperform the broader EM currency basket overnight and in early morning trade, trading weaker with little signs of the heightened social unrest easing.

BOND UPDATE

Political instability and market volatility will detract from the information capacity of May's retail sales data set to be released later today. Moreover, the sector's nascent recovery will be in jeopardy for obvious reasons. It is interesting to note that mining stocks and diversified exposure were favoured, perhaps due to superior risk characteristics if downside pressure on the ZAR extends. Risks to the currency market are clearly being priced in when looking at options prices, with 3-month implied volatility levels rising quite sharply. The 3-month is now trading at 14.98%, up over 100bp from July lows while testing fresh July peaks.

 

While the usual knock-on effect of a bear move in other SA markets is towards support for traditional safe-haven assets such as SAGBs, it is interesting to note that a bear steepening move has been underway. The R2048 yield gained over 11bp on the session yesterday and is now 27bp higher than last week's lows at a yield of 10.67%. The R186 is lagging the move with yield gains of around 13bp. The All-Bond Index has meanwhile lost 0.94% since Friday's close.

 

South Africa's emergent political fragility is shining through. All eyes will be on the Constitutional Court's judgement on whether ex-president Zuma will face his sentence and the resulting reaction among supporters. The US Beige Book will meanwhile be a focus internationally today as investors attempt to determine whether the US recovery is underway while yesterday's data suggests that inflation pressures are rising up over there.

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Research Team

Media, Sasfin Bank

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