Daily Commentary – 01 November 2018 | Merchant West

Daily Commentary – 01 November 2018

Merchant West Advisory Services

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za

USD / ZAR 14.6953 - EUR / ZAR 16.6865 - GBP / ZAR 18.9210 -

Economic Events:

01 November: UK BOE Bank Rate - SA Absa Manufacturing PMI - US Initial Jobless Claims, ISM Manufacturing

02 November: EC Eurozone PMI - US Trade Balance and Change in Nonfarm Payrolls

Market Commentary:

The rand has been struggling to gain traction as subdued risk appetite continues to drive the local unit down. Yesterday marked the end of a difficult month for international markets, with currencies, bonds and equities succumbing to the pressure. On the domestic data front, disappointing trade balance figures also weighed on the rand after recording a nearly R3bn deficit, coupled with a sharp drop in export activity. Markets will also begin to shift their attention towards the upcoming SARB interest rate decision, looking for clues on whether rates will be utilised as a tool to support the struggling currency. “The South African Reserve Bank earlier indicated that local interest rates are set to rise within the next two years, as consumer inflation could reach the upper band of the Bank’s 3% to 6% inflation target. The Bank’s monetary policy committee (MPC) will have its last meeting of the year from November 20 to 22 (source: Business Day). Despite the weak economic data on the domestic front, the US dollar could ultimately determine the rand`s direction. “The rand is expected to trade just 2% higher in a year as local economic reforms kick in and support the currency, but it may be held back by a potentially more hawkish US Federal Reserve, a Reuters poll found” (source: Moneyweb).

In the US market, the dollar index which tracks the greenback against a basket of other major currencies, retraced earlier gains to close 0.3% weaker on the back of a stronger euro and pound. However, the dollar soon found support from positive private sector payroll figures, which reaffirmed ongoing growth in the US economy and fuelled expectations of further interest rate hikes. Markets are expecting a 25 basis point hike in December. “The U.S. Federal Reserve increased interest rates in September for the third time this year and is expected to raise rates again in December, even as the European Central Bank’s plan to raise rates late next year may be challenged by alarmingly slow growth in the euro zone region” (source: Reuters).

In the European market, the outlook for the common currency has shown little improvement as the Italian budget and Brexit jitters weigh. In the UK market, the pound has been struggling over recent weeks, but has made a rapid recovery on the back of Brexit optimism. “The British pound jumped on Thursday on a report that Prime Minister Theresa May has struck a deal with Brussels that would give UK financial services companies continued access to European markets after Brexit” (source: Reuters). However, despite positive sentiment, markets are still predicting volatile trade ahead for the pound as headlines on the Brexit deal remain mixed. “Traders hold a more negative view on the outlook for the pound than at any time since shortly after the Brexit referendum in 2016, according to options markets, as fears grow that Britain is headed for a sudden, disruptive exit from the European Union” (source: Reuters).

Our Range for today: R14.6000 - R14.8500