Morning Note /

EMEA Daily: ZAR slide continues, rest of EMEA more stable

  • Global monetary tightening remains key market theme as ECB and Fed up hawkish rhetoric

  • Global monetary tightening remains key driver of EM bond markets

  • ZAR pummelling continues after break out of longer-term trend channel

Danny Greeff
Danny Greeff

Financial Market Analyst

Daron Hendricks
Daron Hendricks

Financial Market Analyst

ETM Analytics
22 April 2022
Published byETM Analytics

ZAR slide continues, rest of EMEA more stable

Talking Points: Global monetary tightening remains key market theme as ECB and Fed up hawkish rhetoric

Global: Fed rhetoric continues to point to an aggressive monetary tightening trajectory, with Chairman Powell outlining his most hawkish approach to taming inflation to date this week. Simultaneously, intimations from the ECB have also turned more hawkish, triggering an increase in market bets for rates lift-off later this year. This has implications for markets more broadly, as the prospect of tighter financing conditions leads to increased risk aversion as investors turn more judicious over where they invest their capital.

South Africa: News has emerged that Barclays Bank sold half of its stake in ABSA – a sale of more than R10bn. These funds are likely being expatriated into hard currency, exacerbating broader ZAR weakness. If that is indeed the driver of this week's move, the ZAR's decline may be short-lived. However, that is not to say the local unit is out of the woods. Although many of the tailwinds that have helped the ZAR recover since December remain intact, external headwinds are growing stronger.

Turkey: Turkey's adjusted consumer confidence index fell from 72.5 to a record low of 67.3 in April. High inflation and the prospect of tightening global financing conditions are weighing heavily on consumer sentiment, and will likely continue to in the months ahead as the central bank has done little to curb mounting price pressures. Weak consumer confidence could translate into weaker consumer demand down the line, in turn hurting Turkey's economic growth rate.

Russia: President Putin claimed victory in of the biggest battles of the Ukraine war, declaring the port city of Mariupol "liberated" following weeks of relentless bombardment. While, there are still Ukrainian forces in the city, Russian troops have them surrounded. Mariupol, a major port in Ukraine's eastern Donbas region, sits between areas held by Russian separatists and Crimea, the Black Sea peninsula Moscow seized in 2014. Capturing the city allows Russia to link the two areas.

Hungary: With the state-regulated prices introduced for number of products set to expire coming month, there are growing worries if the government will keep them in place given that they are still yet to make a decision about the future of the price ceilings which have helped alleviate some pressure on households following the surge inflation in recent months. Commenting on the matter, the Prime Minister's chief of staff, Gergely Gulyas said he is optimistic that the price caps will be continued, but the decision will depend on serious political and economic considerations.

Poland: In terms of economic data, we only have the latest retails figures out to close out the week. Consensus expectations are for retail sales growth to have rebounded in March, buoyed by higher wages, a tightening labour market, rejuvenated domestic and global demand and the government measures implemented to reduce the cost of staples and other necessities. A rebound in the retail sector will support economic growth. However, stronger domestic consumptive dynamics will continue to led to higher consumer prices. While, the retail sector performance is likely to remain fairly robust, high inflation will keep eroding the purchasing power of many and rising borrowing costs could curtail spending on larger items going forward. 

Czech Republic: The Automotive Industry Association reported that the production of passenger vehicles in the Czech Republic fell by 18.9% y/y to 269,090 vehicles in Q1. The carmakers continued to be hit by part shortages, with the Ukraine crisis adding further uncertainty surrounding operating conditions. The significant rise in commodity prices and components is an even greater concern for the sector and the broader economic outlook. The association has appealed to the government to subsidise some of its labour costs to deal with the high manufacturing costs.

Fixed Income: Global monetary tightening remains key driver of EM bond markets     

South Africa: Markets can sometimes behave counter-intuitively, and this was certainly on display yesterday. Despite the ZAR crashing to test 15.40 from levels closer to 15.08 in the morning, news that rebuilding Kwa-Zulu Natal might cost as much as R12bn, the disinvestment of Barclays from ABSA and the news that Eskom has had to foot a R7bn bill through 2021 to ward off load-shedding, bonds did not weaken. The middle to longer end of the yield curve actually shifted lower to help the curve flatten. It may be that some direction was taken from the dip in US Treasury yields or that investors are factoring in the sharp slowdown that both the IMF and the World Bank alluded to in their downwardly revised forecasts. It may also be that the jump in FRA rates yesterday helped buoy the curve's short-end and raise the attraction of the longer-end that was deemed too steep for the prevailing economic headwinds. Either way, domestic bond yields fell, and the bond market did not respond to the ZAR's weakness by weakening as one might have anticipated.

Turkey: Turkish USD-denominated bonds retreated slightly on Thursday, with yields rising across most of the curve through the session. Moves were most pronounced at the short end of the curve, leading to a slight unwind of the bull-steepening of th prior day. This steepening bias remains the market's broader trend, however, as the Turkish USD yield curve has steepened sharply year to date. The bias also remains towards further steepening going forward, as global financing conditions look set to continue tightening in the weeks and months ahead.

Russia: Russia is currently in a 30-day grace period on $649mn worth of debt payments that were due on the 4th April. This would signal a historic default. Investors will have very few options to recover their money, another unintended consequence of Western sanctions. Sanctions and the freezing of Russian assets can negatively affect any companies or investors exposed to Russia. Bond market investors may well lose most of their funds. While the risk of default has been priced into CDS rates, the market has traded with a high degree of volatility as Russia continues to make innovative plans to avoid default.

Hungary: Appetite for Hungarian bonds improved during yesterday's auction, with total demand coming in at HUF155.8bn, prompting the AKK to sell a combined HUF60.0bn, HUF20.0bn more than the original offer. Substantial interest was seen for the 10yr and 5yr bonds. Investors favoured the 10yr tenor, attracting bids HUF92.0bn (compared with HUF17.9bn two weeks ago). The government agency sold HUF26.0bn of the 10yr bonds, HUF11.0bn more than planned. This generated a cover ratio of 3.54, more than double the ratio seen two weeks ago.

Poland: During a regular auction held yesterday, Poland sold a combined PLN7.54bn in six types of treasury bonds, including PLN777.5mn at the top-up auction. At the open auction, demand arrived at PLN7.63bn which prompted the government to sell PLN6.76bn, close to the upper end of the PLN3-7bn supply range. Appetite was stronger for the 2027 fixed-rate bond, with primary dealers bidding for PLN3.0bn and the government selling PLN2.64bn, generating a cover ratio of 1.14 (versus 1.64 at the last auction on April 12). Investors also favoured the 2032 fixed-rate, attracting bids of PLN2.52bn, which is 1.15 times the amount of the securities sold. Notable interest was also seen in the 2027 floater and the government managed to sell PLN1.28bn at the open auction.

Czech Republic: Czech bonds consolidated yesterday, except for the 10yr and 15yr tenors, which reported a mild bearish bias. Investors awaited the International Monetary Fund's discussion for policy cues against the backdrop of a relatively calm day in the Czech Republic. The benchmark 10yr bond yield rose above a peak last seen in October 2011 at 4.08% and has scope to rally to a thirteen year high of 5.23% in the near term as the US Fed remains committed to taming inflation as Fed Chairman Powell opened the door for a 50bps interest rate hike in May. Locally, the inflation rate remains elevated, and the central bank is now debating whether they should intervene in the FX market to strengthen the CZK to curb inflation as rate hikes are proving ineffective. Czech reserves are huge, but they might plummet drastically if investors speculate against the bank's efforts to strengthen the local currency.

Forex: ZAR pummelling continues after break out of longer-term trend channel      

South Africa: The ZAR was once again the market outlier yesterday, notably underperforming its emerging-market peers for a third successive session. Following a significant break out of its broader trend channel, the ZAR depreciated 2.40% through the session to take its weekly decline to over 5%. Note that this has been its largest weekly sell-off since early-2020, when the discovery of COVID-19 wreaked havoc in financial markets at large. However, this week's depreciation has unwound much of the ZAR's overvaluation, meaning bearish impetus may begin to fade into the sessions ahead. After such a brutal sell-off as the ZAR experienced this week, many stale short USD positions have now been cleared out. Although investors will be wary of re-establishing short positions given the volatility (and the recent surge in implied volatility), some stability is expected to return. However, technical analysis suggests that levels closer to R15.5000/$ might be tested before that unfolds, and so investors are advised to proceed cautiously.

Turkey: The USD-TRY remained in a consolidatory channel on Thursday. Its steady performance comes on the back of the Turkish government taking fresh steps to bolster foreign exchange reserves by requiring hard currency earned by services sector firms to be exchanged with the central bank earlier this week. Also, the CBRT recently increased the rate at which exporters must convert their forex revenue into lira to 40% from 25%. Despite the steady performance, the bias in the pair is skewed to the upside amid the underlying weak macroeconomic fundamentals and the more hawkish signals from the US Fed, buoying the greenback and driving UST yields higher.

Russia: The RUB bulls remained in charge yesterday, with the currency gaining for a fifth straight session to close below 75.00/$. Trading patterns remain somewhat artificial due to capital controls, but the currency is certainly enjoying tailwinds due to elevated energy exports. Simultaneously, the currency is supported by a reported 3trln RUB that companies are due to pay in taxes this month, with export-focussed firms needing to sell foreign currency to make these payments. The bias thus remains in favour of the bulls in the near term, notwithstanding the fact that valuations are artificial.

Hungary: The HUF extended its winning streak against the EUR yesterday, with the local currency posting its fourth consecutive gain. The EUR-HUF closed Thursday's session at a 2-week low of 370.40, according to Bloomberg data. This means the HUF has strengthened by 1.48% against the EUR in the first four sessions of the week. Heading into the final session of the week, it appears as if the bullish bias in the HUF has faded with the EUR-HUF trading higher in the early hours of today. That said, the losses in the HUF this morning are modest and therefore expect the local currency to close the week in the green.

Poland: The EUR-PLN remains rangebound, trading between the 50DMA above at 4.6722 and the 100DMA below at 4.6234. The cross is expected to remain within this trading range over the near term, not moving too far away from the 4.64000 level. Implied volatility levels, meanwhile, continue to decline, weighed down by sliding historical volatility. The 1-week tenor may, however, find support today as it will begin coverage of next week's CPI release.

Czech Republic: The EUR-CZK extended its slide yesterday, finishing the session at 24.360 as the bears continue to eye the 24.300 support. A breach of which would test its 2022 low of 24.100, but this may have been hampered by hawkish remarks from the Federal Reserve Chair Jerome Powell overnight that has spooked investors. Heading into the weekend, the EUR-CZK has firmed slightly after having a short probe of the 24.400 mark. Any move higher could see the EUR-CZK unwind its weekly losses and close in the green.