NCD rates traded to a high of 8.80% in May 2016 tracking the weakening of the Rand, but traded down to 8.58% as at 30 June 2016. Forward rate agreements (FRA’s), used to speculate on borrowing costs, kept on creeping upwards during April and May, pricing in a probability of a further 25 basis point hike later in the year. This year has already seen a total of 75 basis points hike in the Repo rate, 50 basis points in January and 25 basis points in March.

During the quarter under review the Rand was very volatile and traded between a low of R14.11/USD and a high of R16.24/USD. Fluctuations were due to local and global developments and economic data. Growth remained low which resulted in the Repo rate being kept on hold at 7.0% at the May 2016 MPC meeting. Inflation also surprised to the downside moving from 6.3% y/y in March to 6.1% y/y at the end of June.

The credit rating agencies released their credit assessments on South Africa during the second quarter. Moody’s Investor Services kept South Africa’s sovereign currency long term debt rating at two notches above sub-investment grade, at Baa2, while assigning a negative outlook. Both S&P Global Ratings and Fitch Ratings Ltd kept their credit assessments unchanged at one notch above sub-investment grade at BBB-, with a negative and stable outlook, respectively. The Rand came under pressure after the UK voted to leave the European Union, this outcome triggered volatility across markets. The “Brexit” vote has also diminished the chances of a Fed rate hike later this year, according to Fed futures.

After the recent change in global interest rate dynamics, a possible slowdown in global growth due to the impact of the “Brexit” vote and the lower than expected print in local CPI for May, FRA rates moved lower. The FRA market is pricing in a low probability of a rate hike of 25 basis points in September, with a higher probability of a hike only in November. Three month JIBAR moved higher during the last quarter, closing at 7.37% for June 2016. We continue to trade defensively, with prime linked and JIBAR linked notes being the preferred assets of choice given the current macro conditions.

The negative effects of the events that took place in Q4 2015, continued to weigh heavily on our markets well into Q1 2016. During the quarter under review our local currency hit highs of R16.88/USD , while together with the effects of the drought on food prices were seen posing an upside risk to inflation. This resulted in repo rate being hiked by (50bps at the Jan MPC to 6.75%), followed by another (25bps hike at the March meeting to 7.00%) with view that CPI will average 6.6% for 2016. To date, the FEB 2016 CPI has been the highest printing at 7.0% y/y, levels last seen since 2009.

The 2015/2016 Budget speech also took place were local growth was revised lower to 0.9% for 2016. The overall sentiments from the speech focused mainly on financial discipline rather economic growth, which has remained under pressure due to both domestic and global developments. Following the developments from the speech, rating agency Moody’s placed SA’s long term rating of Baa2 under review for a possible downgrade citing its concerns around SA’s ability to stabilize and restore fiscal strength under current conditions.

NCD rates continued to move sideways, tracking the movements in the Rand. Our 12 months NCD rates have come down from previous highs of 8.70% now trading around 8.50%, as the Rand strengthened to below R14.70/USD. The currency gains were supported by recent dovish statements by the Fed’s Chair, stating that the deteriorating world global growth warranted a slow approach to tightening monetary policy, therefore pushing out expectations for a rate hike in the US. While locally, the better than expected Trade Balance number for FEB as well the outcome of the Concourt’s decision on President Zuma violation of the constitution supported the currency.

FRA rates have since moved lower, with the 1x4 FRA’s now discounting less than a 30% probability of a 25bps hike at the May meeting. 3months Jibar rate moved higher by (62bps) from 6.578% in Jan to 7.233% by end March. We continue to trade defensively, with the Prime linked notes being the preferred asset of choice given the current conditions. 12 months Prime linked note are trading at (Prime 10.50% -2.35%) yielding 8.15% on a monthly basis, compared to the 3 months Jibar linked notes.

Markets were volatile for the last quarter under review. The Reserve Bank Governor raised the repo rate at the November MPC meeting by 25 basis points to 6.25%. This is the second 25 basis points repo rate hike in 2015. The governor commented that although volatility in global asset markets had moderated amid improving risk sentiment, emerging market foreign exchange markets have been volatile and vulnerable to capital outflows. South Africa has not been immune to capital outflows. The Governor also commented that the risks to the inflation forecast have increased and that inflation is expected to breach the target range in the first quarter of 2016 and is expected to average 6.4%. The reasons for inflation pressure being a depreciating rand, drought conditions which will impact on food prices, and the possibility of further electricity tariff hikes. Although the local economy has weakened even further the Governor re-iterated that the SARBs mandate was to manage inflation and that the reason for the rate hike was pre-emptive on the part of the MPC committee. The SARBs monetary policy actions are expected to continue to focus on anchoring inflation, while remaining sensitive to the fragile state of the South African economy.

Early December Standard and Poor's rating agency revised South Africa's rating from a stable to a negative outlook and Fitch downgraded South Africa's rating to BBB-. Both agencies citied concerns of South Africa's debt to GDP ratio, especially the government increase in debt to GDP ratio , which has increased from 26% in 2008/2009 to 56% in 2015/2016.Fitch indicated that South Africa would be downgraded further if fiscal discipline was not maintained. A week later South African minister of finance Nhlanhla Nene was replaced in a surprise move with unknown David Van Rooyen. This event was not received well by the markets and foreign investors. The rand further depreciated to R15.40 to the US dollar from R14.40. David Van Rooyen was then replaced 4 days later with well-known Pravin Gordhan, this move was seen more favourably by foreign and local investors .The rand has however not recovered back to previous levels and remains a concern for further inflationary pressures. The rand closed the year at R15.49 to the US dollar in comparison to 31 December 2014 of R11.50.

One year NCD rates are currently trading at 8.35%, this is up significantly from 30th September where one year NCD were at 7.40%. One year forward rate agreements are discounting the possibility of a 1.5% repo rate increase in a years' time. Money market funds will continue to trade defensively as the risk to the upside on rates remains.