The ruling ANC has for many years called for radical transformation, of society and the economy, to attain “shared prosperity, social justice and human solidarity”. Yet it is still not clear what radical policies and tactics will be employed. Its nine Discussion Documents, prepared for its National Policy Conference starting on 30 June, do not in general reveal much that is radical, in our assessment. Radical interventions may well be formulated at the Policy Conference in July and adopted at the Elective Conference in December 2017, but for now we highlight the following themes:

The Discussion Documents in general reveal: first, honest self-reflection on the recent failings of the party and the need for renewal to arrest its “declining fortunes”; second, a continued reference to the National Development Plan, as the guiding long-term plan; third, statements on fiscal and monetary policy that investors will find reassuring, in our view; fourth, acknowledgements of where policy and tactics have not worked and which need to be reformed; fifth, a continued devotion to the utilization of state-owned enterprises as channels for economic development; and sixth, a desire to transform the other three pillars of the state – the legislature, the judiciary and the media. A final general observation is that the documents, as they currently stand, allow for wide interpretation of what radical transformation would look like and how it would be achieved. Herein lies the uncertainty for investors.

Of 108 key selected extracts – statements, proposals or tactics ? from the nine Discussion Documents, we consider: (a) 70 (in isolation) as positive for growth, productivity and investment; (b) 30 as neutral, either because we have uncertainty about intentions or they have little direct financial market impact; and (c) 8 as negative. Within the list of 70 ‘positive’ statements, proposals and tactics, we think that 32 have elements over which investors have doubts, be they about the ANC’s commitment, implementation, funding or unintended consequences of policies. Within the list of 30 ‘neutral’ statements, proposals and tactics, we think that 19 have elements over which investors have uncertainties. Within the list of 8 ‘negative’ statements, proposals and tactics, all will be of concern to investors.

There is much in the ANC documents that is worthy of debate and serious analysis. We are however concerned that this will not happen at the ANC’s Policy Conference, which could be used by factions to strengthen positions for the party’s leadership battle. Policy positions could end up being mere proxies for factions, according to former Deputy Finance Minister Jonas, who recently also said that populism could hijack the policy discussions.

According to data released by the South African Reserve Bank (SARB) on Thursday South Africa’s money supply and private sector credit grew at weaker pace in February. M3 grew 6.63 percent year-on-year in February, slower than the 7.91 percent increase in the previous month. Money supply growth rate missed expectations to remain at 7.9 percent.

Private sector credit climbed 5.26 percent annually, following a 5.52 percent rise in January. The annual growth was also weaker than the expected 5.3 percent.

The South African Reserve Bank will announce the Monetary Policy Committee’s decision on repo rates at 1300 GMT and analysts largely expect the central bank will keep benchmark lending rates on hold at 7 percent at its policy announcement.

South Africa’s rand firmed against the dollar early on Thursday ahead of the central bank’s interest rates decision, but looked vulnerable to speculation of an imminent cabinet shake-up that could see Finance Minister Pravin Gordhan removed.

USD/ZAR was trading at 12.87 at around 1050 GMT, down 1.21 percent on the day. The pair hit near 3-week highs of 13.1578 on Wednesday’s trade. Momentum studies on daily charts are neutral and the pair is hovering around 20-DMA at 12.8715. A decisive close below could see further drag lower.

Data from Statistics South Africa showed on Wednesday that the nation’s headline consumer inflation slowed to 6.3 percent year-on-year in February from 6.6 percent in the previous month, matching consensus estimate in a Reuters poll. This was the weakest inflation reading since September 2016, when prices had risen 6.1 percent.

On a month-on-month basis, inflation rose to 1.1 percent from 0.6 percent previously. The month-on-month rise missed expectations at 1.2 percent. Core inflation which excludes the prices of food, non-alcoholic beverages, petrol and energy, inched lower to 5.2 percent year-on-year in February from 5.5 percent and rose to 1.1 percent on a month-on-month basis from 0.3 percent.

Separate data from South Africa’s Reserve Bank on Wednesday showed South Africa’s current account deficit narrowed to 1.7 percent of GDP in the fourth quarter of 2016. The reading was the lowest shortfall in nearly six years, and compared to a revised deficit of 3.8 percent in the third quarter.

Analysts had expected a 3.5 percent deficit for the quarter. For the year as a whole, the current account deficit narrowed to 3.3 percent of GDP from 4.4 percent in 2015.

Commodity markets are taking centrestageas oil had its largest one day fall (- 4.5%) in 13 months. Oil net long positions from the CFTC have been overextended since the start of the year, but it was the combination of technicals and ever more inventory builds in the US that gave investors the signal to take profit. Within G10, CAD has been, and should continue to be, more sensitive than NOK because leveraged market positioning is still very long CAD. CADJPY is sitting on its 100DMA, with a move below 84.20 marking a technical break. AUDUSD is about to break below its 100DMA at 0.75,helped by iron ore prices falling 9% from their peak, keeping us bearish on this pair. AUDUSD has bounced off the top end of a trend channel, bringing the bottom end of the channel at 0.7080 into focus. Even with expectations of a neutral Norges Bank next week (or essentially less dovish than last time), we stick with our tactical long USDNOK trade of the week.

Oil inventory data from the EIA showed a rise of 8.2mb to 528.4m, which is the highest in the data series going back to 1982. US producers appear to be ramping up production quickly, helped by stronger margins from high oil prices and relatively low funding costs. According to Reuters, producers in the red-hot Permian Basin in Texas are expected to increase production soon. An observation from our oil desk highlights the extent of the extreme technicals. They say that there hasn’t been a time in the last 30 years when the weekly front end Brent contract has been in such a tight range, trading sideways for three months. The longer that went on for, the more positioning stresses built up, explaining the sharp drop yesterday. The next formal OPEC meeting isn’tuntil May 25.

The DXY is still under performingtherisein positive US data surprises: Yesterday’s bumper ADP jobs estimate of growth of 298k in February beat market consensus of 187k. Our US economist has revised up his NFP expectation from 200k to 250k. Jobless claims hitting a series of record lows all year, combined with one of the warmest Februarys on record, has helped outdoor industries like construction do well. The market now prices a 100% probability of a hike in rates by the Fed next week, and so any USD strength needs to be driven by expectations of a faster pace of rate hikes in 2018.

JPY: Investors sensitive to US yields: Weekly security flow data for last week showed Japanese net selling of 1.13trn of foreign bonds. There will likely be some volatile data in the run-up to fiscal year-end (March 31) but we think there should be more focus put onto country reallocations for Japanese investors, with a potential to shift into higher-yielding assets. Yesterday the Nikkei reported that the Japanese Financial Services Agency will start to audit regional banks who have large exposures in foreign debt. In particular, concerns have been raised about losses made on US Treasuries. The benefits of USD rising versus JPY as US Treasuries sell off are not there if the bank is holding the foreign asset with an FX hedge. This story needs to be watched to see if changing governance may push Japanese banking sector investments locally instead of abroad. Thinking about that flow, it may actually still be bearish for JPY if it puts downward pressure on JGB yields or increases local lending. If the BoJ’s central bank liquidity turns into ‘high-powered liquidity’ as the banks lend more to businesses, this would help local inflation and thus weaken JPY. Selling EURGBP over the ECB: Today’s market focus will be on the ECB press conference and specifically how much more confident Draghi is about the recovery in inflation. Should the market, against our economist’s expectations, perceive today to be a hawkish outcome, then we think that EUR will trade in two stages. Initially EUR should rally as bond yields rise (with our limit being at 1.08). However, the bond yield rise may be disproportionate across the region, causing spreads to widen. The spread widening is not a good sign for the monetary union as it will highlight further the divergence in economic data performance. EUR should fall as markets realise this and EUR becomes inversely correlated with peripheral spreads. On the UK side, Nicola Sturgeon has suggested to the BBC that a second independence referendum in autumn 2018 would make sense but still stresses thatno final decision has been made. This story adds to our bullish GBP view since it may bring Theresa May’s approach to the Brexit negotiations away from the ‘hard Brexit’ and towards the middle to accommodate Scottish views. We think that Brexit risks are largely in the price and still like selling EURGBP, with a stop at 0.88.

South Africa Inflation and Central Bank Outlook

Consumer price inflation in December was a higher-than-expected 6.8% yoy. Our expectation had been 6.5%, the same as the median consensus estimate. In November that rate was 6.6%. The average for 4Q 2016 was 6.6%; the highest of the year. Core inflation in December also jumped, to 5.9% from 5.7%, according to data published yesterday by Statistics South Africa. Numerous components of CPI were higher than our estimates, in particular:

? ‘Food and non-alcoholic beverage’ prices (15.4% of CPI) were up 0.8% mom; and

? ‘Housing and utilities’ prices (24.5% of CPI) were up 1.0% mom; Some core inflation items also surprised on the upside:

? ‘Alcoholic beverages and tobacco’ prices (5.4% of CPI);

? ‘Household contents and equipment’ prices (4.8% of CPI;

? ‘Recreation and culture’ prices (4.1% of CPI); and

? ‘Restaurant and hotels’ prices (3.5% of CPI).

The profile of the jump in inflation in December would support a continued cautious approach to monetary policy, in our view. Inflation looks likely to remain elevated for some time still, before the benefits of the recent decline in domestic agricultural prices begin to filter through. We still expect that inflation will decline through the year, but a sustainable return within the inflation target range of 3%-6% is only likely towards the end of 2017, according to our estimates.

Our estimates for CPI inflation assume a USDZAR rate of 15.25 at the end of 2017, and a Brent oil price of $60/bbl. by year-end (. We think that the Reserve Bank’s monetary policy committee will hold the repo policy interest rate at 7.00% throughout 2017. Retail trade data published yesterday showed that sales in November were up a very strong 3.5% mom, in seasonally adjusted and constant price terms. We will comment more fully on the domestic trade sector after the publication today of some additional data.


Emerging Markets, Mexico, Turkey and South Africa

Long USD positioning remains relatively muted, as our positioning tracker indicates. As such we expect pullbacks in the USD to be reasonably shallow. Nonetheless, we believe that high yield EM currencies will post decent total returns in the near term as real yields in the US are starting to stabilize and commodity prices continue to rally. Typically EM currencies do fine during periods when real UST yields are stable, even as nominal yields move up. BRL is our top high yield pick.  

We maintain our bullish stance on Brazilian assets despite the latest negative headlines on Brazil. Focus has turned to concerns over the 2017 growth picture.  Tomorrow’s IPCA release could also support the trade if it continues to decline, opening the way for an aggressive cutting cycle. We are also watching headlines regarding uncertainty surrounding Temer’s cabinet, as domestic politics remain the greatest risk to our otherwise constructive view on the country, and in particular our long BRL/COP position. Today’s current account data will provide information on the external health of the economy.

The Turkish PM has stated that he believes the CBT will take measures on the TRY’s volatility, which has raised expectations of a 25bp hike at this Thursday’s central bank meeting. The impact of declining TRY deposit rates will mitigate the impact, and with the authorities doing little to change the dominant view in the market that they would prefer to have lower TRY interest rates over the medium term, we doubt the impact of a small rate hike on TRY will be meaningful. Latest data on FX deposit trends suggest that even as the currency depreciates, there is a reluctance of local deposit holders to shift back into TRY, from foreign currency. So far in November, the value of deposits in foreign currency has stayed broadly flat in USD terms.

South Africa continues to take measures that reduce the likelihood of a ratings downgrade and support market sentiment. Following labour market reform measures yesterday, the government has announced plans to delay building nuclear power plants, which will lower the market’s concern about potential contingent liability risks that the projects entailed. This should support ZAR in the near term, though we believe that the base case for the market is already that South Africa will avoid a ratings downgrade. Moody’s announces its ratings decision on November 25th,and S&P is on December 2nd.