Sasfin : Forex Daily Market – SA Producer price growth is approaching

Today’s Talking Point

FOMC Meeting

Expected: 0.00% – 0.25%

Prior: 0.00% – 0.25%

Analysis: Producer price growth in SA has accelerated to record highs and have yet to indicate that they are approaching their peaks. Ongoing supply-side pressures, elevated global commodity prices, and rising input costs due to a shortage of raw materials, reported by the latest leading indicators, suggest December is in for a fresh new all-time high. A median Bloomberg survey has pencilled in the PPI index accelerating to 10.25 y/y in December from 9.6% y/y registered in November. Higher manufacturing costs are beginning to weigh heavily on companies’ bottom lines and thus they will be more tempted to pass on some of their cost increases to consumers. It is reaching a point now whereby manufacturers are decreasing their purchases to reduce manufacturing costs. Therefore, increased producer prices can be expected to filter across into consumer prices in the months ahead until prices stabilise.

Rand Update

Ahead of the FOMC decision and statement yesterday, the ZAR showed some impressive resilience to appreciate in the face of a Fed announcement that was likely to confirm that the end of the taper would take place in March and that rates hikes would follow. Only once the announcement was made, to confirm what the central bank had been signalling, did the USD surge stronger, placing emerging market currencies on the defensive. The USD index is now looking to re-test the November and December highs as investors once again focus on the monetary policy divergence that will manifest between the US and its major trading partners.

While there was some hope ahead of time that the market was fully priced and that the ZAR would take the announcement in its stride, it is now clear that there is still some lagging support for the USD. Data and earnings out of the US yesterday may have also helped to tilt the scales in favour of the USD. Earnings beat expectations to the topside, confirming that corporate America is still expanding and doing well. At the same time, the economic data was also strong to signal an economy that has underlying resilience to tolerate tighter monetary policy.

Furthermore, the Brent crude oil price briefly broke through the $90 pb mark, and Fed Chairman Powell spoke of the Fed’s commitment to a sustained fight against inflation. The combination has seen the USD-ZAR surge higher as it now places emphasis on the SARB, which is also facing an inflation episode, but without the underlying strength of the economy or an out-performing corporate sector. The SARB will likely hike 25bp today and signal that there is more to come, but the risk here is that it does less than what it has signalled in its Quarterly Projection Model (QPM).

Bond Update

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