Daily Commentary – 19 October 2018 | Merchant West

Daily Commentary – 19 October 2018

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

USD / ZAR 14.3968 - EUR / ZAR 16.4765 - GBP / ZAR 18.7392 -

Economic Events:

19 October: EC Current Account - US Existing Home Sales

Market Commentary:

Local front - South Africa's rand firmed in early trade on Friday, in line with most emerging Asian currencies as Beijing pledged more policy support to mitigate risks from a trade row with the United States. The rand was 0.29 percent stronger at 14.4125 per dollar at 09h25, having closed in New York at 14.4550 on Thursday. The currency is expected to trade between 14.2500 and 14.5500 to the dollar, NKC African Economics wrote in a note.

Moody’s Investor Relations has published a credit opinion report on South Africa, although will look to next week’s (24 October) Medium-Term Budget Speech (MTBS) before releasing its next ratings review on the country. The ratings agency is the last amongst its major ratings agency peers (Standards & Poor’s and Fitch’s) to still have South Africa’s local currency debt at investment grade (albeit only one notch above sub-investment grade or “junk”).

Some of the key points from Moody’s credit opinion report are as follows:

  • Economic growth for South Africa revised (lower) to 0.5% in 2018 and 1.3% in 2019
  • Government needs to stimulate growth through policy and investment
  • State Owned Enterprises need to be stabilized to reduce the “contingent liability” to a debt burdened government
  • Reforms which address SOE’s could be positive to ratings
  • Failure to address SOE debt and Government liabilities could be negative for ratings
  • Government could reduce the deficit from 4.3% of GDP to 3.5% of GDP by 2020/21
  • Debt should be maintained below 60% of GDP (IG SA)

International currency front - The euro hovered near a one-week low against the dollar on Friday as the European Commission's criticism of Italy's populist budget sparked fresh concerns about political tensions in the common currency zone. The dollar index, a gauge of its value against major peers, was 0.05 percent higher at 95.96 on Friday, having closed on Thursday at its highest level since Aug. 21. That rise was driven by a steep fall in the euro on Thursday, which constitutes around 57 percent of the index.

The euro was relatively flat at 1.1454 against the greenback on Friday, steadying slightly after losing 0.4 percent overnight. The single currency hit its lowest intra-day level of 1.1447 since Oct. 9 on Thursday after the European Commission said Italy's 2019 budget draft is in serious breach of European Union budget rules. The Commission said in a letter to Italian Economy Minister Giovanni Tria, that planned government spending was too high, the structural deficit - excluding one-offs and business cycle effects - would rise instead, not fall, and that Italian public debt would not come down in line with EU rules. This has sparked investor concerns about more political tensions in the EU between Brussels and member states, which has hurt the euro. Italy’s prime minister defended the nation's free spending budget, though markets were not impressed. “The euro decline reflects the buildup of political tension in the eurozone," said Sim Moh Siong, currency strategist at Bank of Singapore. “The next support for the euro is at 1.1430, a break of which can take us down to 1.13."

China's economic growth in the third quarter slowed to 6.5 percent, its weakest pace since 2009 and below expectations, as a campaign to tackle debt risks and the trade war with the United States weighed on the economy. The yuan changed hands at 6.9339 on Friday, trading flat versus the dollar, after recovering from its intra-day low of 6.9416."Expectations have increased for the Chinese yuan to depreciate towards its psychological 7 level against the USD," said Eugene Leow, rates strategist at DBS in a note (Reuters)

Our Range for today: R14.2000 - R14.5000