Daily Commentary – 02 November 2018

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

USD / ZAR 14.2950 - EUR / ZAR 16.3472 - GBP / ZAR 18.6255 -

Economic Events:

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

Market Commentary:

Following a volatile start to the week, the rand proceeded to rake in some significant gains yesterday as headlines from Europe aided the local unit. As news broke that strong progress is being made towards a Brexit deal on financial services, the euro and the pound rallied, which in turn placed the US dollar under some pressure. “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). The weaker dollar brought relief for the rand, as well as its emerging market peers as risk sentiment improved and money left safe-haven assets. The rand is now sitting firmly as the best performing emerging market currency and found further relief as trade tensions between the US and China eased. “News of a phone call between U.S. President Donald Trump and Chinese President Xi Jinping raised hopes of an easing in U.S.-China trade tensions” (source: Reuters). The rand has shown little reaction to local economic data and is expected to react more to US dollar moves. “The rand is still down more than 14% in 2018 and has been cited by the Reserve Bank as one of the most important risks to the inflation outlook. If gains are sustained, that may reduce the chances of the Bank raising interest rates in 2019” (source: Business Day).

In the US market, the dollar index which tracks the greenback against a basket of other major currencies, lost nearly 0.9%. The dollar has been benefitting from its safe-haven status, but as the trade tensions appear to have subsided, dollar demand declined in favour of riskier emerging market assets. However, any recovery in the dollar could support the argument of a strengthening US economy and the prospect of further interest rate hikes in the US, which in turn will reverse inflows into emerging markets. Markets will closely follow US jobs and payroll data due later today. “U.S. payroll figures are expected to have risen 190,000 in October from a 134,000 increase in the previous month’ (source: Reuters).

In the European market, the euro has finally joined the list of gainers as Brexit optimism overshadowed political concerns from Italy and Germany. “The United Kingdom and the European Union have made progress on a deal to give London’s dominant financial centre basic access to EU markets after Brexit, two British officials said, but no agreement has yet been clinched… Britain is currently home to the world’s largest number of banks and hosts the largest commercial insurance market” (source: Reuters). In the UK, the Bank of England decided to keep interest rates unchanged at 0.75%.

Our Range for the day: R14.2000 - R14.5000