Sasfin : Forex Daily Market - Oil prices have dipped this morning

Today's Talking Point

Oil Update:

Analysis: Oil prices have dipped this morning after coming off of intraday highs yesterday as the API data in the US pointed to a significant rise in stockpiles last week. The data suggested that US crude inventories increased by a massive 14.9mn barrels last week. If confirmed by the official government data out today, that would represent the largest weekly build since February 2021, and would keep pressure on the market. This has pushed Brent futures back below $80 per barrel and WTI back near $74.40 per barrel, while keeping their respective curves in bearish contango as the market sees ample supply for crude for the near term. Brent's prompt timespread, for instance, is currently around 16 cents per barrel in contango, roughly around the same level seen a week ago. Beyond the inventory data today, traders will be turning their focus to the US CPI figures out tomorrow. If the numbers come out weaker than expected, it would provide crude with a boost as the market will price in a less aggressive Fed and better growth prospects for the US. However, recession fears remain high globally; thus, we don't see oil rising significantly in the near term.

Rand Update

Manufacturing data released yesterday highlighted the difficulties imposed on the SA economy by dysfunctional SOEs. Between Eskom's load shedding and the Transnet strike, there was a lot to detract from manufacturing production, which contracted 1.1% y/y. When looking at the actual production volumes, output remains stagnant and below pre-pandemic levels. South Africa's lack of fuel refining capacity largely dragged down production volumes, which dwindled during the 2020 pandemic. The industry's headwinds were compounded by record-high power outages that negatively impacted competitiveness. As output stagnates, the background trend of deindustrialisation remains in place, negatively impacting the country's economic prospects.

This reduced and constrained productive capacity is disappointing in that it implies that SA may not be able to take full advantage of the improved terms of trade. That does impact the ZAR's ability to scale back lost ground, although, with the terms of trade still buoyant, it will support the current account and ensure that the trading account remains in surplus for a little longer.

Readers are also reminded that as we go into a cyclical slowdown through H1 2023, the ZAR tends to perform better through such periods, especially if exports driven by international demand hold up better than domestic demand. Typically, the weaker demand for imports has helped the ZAR remain resilient historically, and there is no reason why this will not hold true again through the year ahead.

Nothing in the way of domestic data today will see the focus remain on the US inflation data scheduled for tomorrow. It will likely prove market moving and may be the catalyst the market is searching for to drive short-term directional momentum. For now, consolidative trading behaviour will likely persist for a little longer

Bond Update

Bonds/Yield Curve:Although bonds have enjoyed a strong start to the year, they gave back some of their gains yesterday as the ZAR came under renewed pressure. Not much should be read into this, however, ahead of some key data out of the US on Thursday that will be market-moving. That said, demand for SAGBs at yesterday's bond auction was a little disappointing, with bids coming in at R8.66bn, the weakest reading since mid-Oct with the exception of the Dec auction ahead of the ANC elective conference. This may just be a function of this holiday period, so not much should be read into this until next week's auctions when trading within the markets normalises. The longer-term prospects for bonds remain constructive.

FRAs:A consolidative trading session was the order of the day yesterday, although importantly, the rate cuts that are being priced into the longer end of the curve remain sustained. As the domestic and international inflation cycle softens and interest rate indicators peak, FRAs are likely to resist the temptation to trade higher. If the ZAR can regain lost ground and break through key USD-ZAR support, the arguments for rate cuts only intensify. Oil prices remain subdued, and the inflation picture at the start of 2023 looks decidedly better than it did just two months ago. The adjustment is, therefore, justified and will likely extend.

Repo:The SARB has thus far kept in lockstep with the Fed to ensure that negative speculation against the ZAR is discouraged. They have been successful in that, and their conservative stance on monetary policy means that the monetary space for inflation to take hold no longer exists. There may be one more 50bp hike at the first meeting of 2023, but after that, the SARB may signal that they have done enough.

Download Full Report