Sasfin : Forex Daily Market – Vehicle sector sales rebounded notably

Today’s Talking Point

Naamsa Vehicle Sales Y/Y: Feb

Expected:

Prior: 19.5%

Analysis: The beginning of the new year started on a positive note for the vehicle sector as sales rebounded notably from a contraction of 3.5% in December to growth of 19.5% y/y. The improvement signals a recovery of domestic demand as the country reopened up further. Looking ahead, the vehicle sector is expected to continue its gradual recovery to pre-COVID-19 levels as domestic economic conditions continue to improve alongside recovering global demand. However, prevailing market conditions continue to be hampered by COVID-19 disruptive elements, namely escalating cost increases and global supply chain bottlenecks, such as a shortage of semiconductors, which will hurt vehicle sales and exports. Additional headwinds stemming from rising interest rates and fuel prices are expected to impact vehicle affordability as household budgets remain constrained.

Rand Update

The full consequences of the war will not be fully understood for some time to come. Imposing sanctions on Russia is all well and fine, but Russia was integrated into the global economy through trade linkages. Cutting Russia off cuts the sanction-imposing country off too, and the consequence is that they will also suffer a negative growth episode. Perhaps not as severe, but some countries in Europe are more interconnected than others, Germany being one of them.

It also implies that the authorities will presumably turn even more tolerant of inflation and not “normalise” policies too quickly out of fear of imposing yet another headwind at this time. US bond yields have presumably dipped on the increased demand for safe havens. At the same time, it also removes the obvious monetary policy divergence argument that has supported the USD in recent months. That would go a long way to explaining why the USD has not surged stronger, despite the uncertain times and the demand for safe-haven assets.

For the USD-ZAR, clear direction is lacking. It is subject to the volatility in global markets and the ebb and flow of risk appetite. However, one bit of good news did come in the form of the constitutional court ruling in favour of the government concerning public sector wages. National Treasury will therefore not need to absorb another R29bn worth of expenses and will be able to keep a lid on the public sector wage bill. It paves the way for at least one of the government’s reforms and will please both investors and rating agencies alike. Although that is unlikely to affect the USD-ZAR as developments abroad overshadow such news, it removes one potential source of negative speculation on the ZAR to leave it range bound and focused on EM currency trends.

Bond Update

Local macroeconomic data made for interesting reading yesterday, with January money supply, trade and the government budget balance released. While credit and money supply data tended to confirm that banks and consumers remain conservative in their borrowing, a dip in the trade balance came in significantly lower than consensus estimates. The government budget balance was as expected, matching consensus expectations amid seasonal dynamics, confirming a deficit month in January.

A look at the details of the trade report indicates that oil had something to do with the narrower trade surplus, while mineral export demand dipped in recent months. In March 2021, there was around R25bn mineral trade surplus to support the ZAR, the highest net mineral surplus on record. By January 2022, the confluence of falling export volumes and relatively lower prices and sharply higher Brent crude prices shrunk the surplus to R11.5bn in January.

While this implies a reduced level of dollar revenues to support the ZAR, the export of other mining outputs has kept the mineral sector contributing to a positive trade surplus with around R50bn in net exports in the month. Still, this is lower compared to 2021’s figures and is the lowest level in net mining exports since July 2020 and around 20% lower than the 2021 average.

The data also suggest that there has been a pick-up in domestic demand and in turn final and intermediate goods imports, which put further pressure on the trade surplus. All this to say that the combination of rising oil prices and a reopening economy may well tip the trade balance into deficit a little faster than ZAR bulls were hoping. And a dip into deficit would imply a bias towards currency weakness in the future. However, the trade data is notoriously volatile and not too much should be read into one month’s worth of data.South African fixed income exposure remains relatively attractive against this backdrop. Due to geographical and economic distance from Russia, SAGBs will be a better choice than countries in Eastern Europe. Mexico and parts of Latin America may also carry some favour, suggesting that EM flows could become more judicious and defensive.

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