Daily Commentary – 31 October 2018

Merchant West Business Finance

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

USD / ZAR 14.6629 - EUR / ZAR 16.6438 - GBP / ZAR 18.6510 -

Economic Events:

31 October: EC CPI Data - SA Trade Balance

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 stabilised yesterday and showed little reaction to the release of disappointing unemployment figures. The unemployment figure came in at 27.2%, higher than the consensus expectation of 26.7%. Despite better performance from the rand and its emerging market peers, the local unit still remains fragile as the tensions between the US and China further escalates. “Investors took cover in the greenback after Bloomberg reported that Washington is preparing to announce tariffs on all remaining Chinese imports by early December if talks next month between U.S. President Donald Trump and Chinese President Xi Jinping fail to ease the trade war” (source: Reuters). The risk-averse sentiment has historically led to an influx into the US dollar as a flight to safety, and usually to the detriment of emerging market currencies. The rand is also further weighed down by ratings fears following last week`s MTBS. “South Africa’s sovereign rating risked being downgraded due to concerns about the postponement of fiscal consolidation and lack of clarity around land expropriation, a senior S&P Global Ratings analyst said on Tuesday” (source: Moneyweb). Given the situation in the US and the possibility of further credit rating downgrades, the rand is expected to remain vulnerable throughout the remainder of the year and will draw significant influence from movements in the US dollar.

In the US market,  the dollar is changing hands at its highest level in more than a year as the US economy goes from strength to strength. “U.S. consumer confidence rose to an 18-year high in October, driven largely by a robust labor market, suggesting strong economic growth could persist in the near term. That follows last week’s data which showed the U.S. economy slowed less than expected in the third quarter” (source: Reuters). The trade war has been a persistent theme since US President Donald Trump first imposed tariffs on the Chinese economy, which to the surprise of many, still hasn`t dragged on the US economy. The net dollar position still speaks to USD bulls and the dollar is expected to build on its current momentum.

In the European market, the outlook remains dim as the euro zone economy failed to meet growth expectations. Political uncertainty has also been one of the major obstacles for the bloc, given the succession concerns of German chancellor Angela Merkel and Italy`s free spending budget. In the UK market, the pound has lost some traction as the Brexit deadline approaches. “The sterling held close to its mid-August lows, hovering at $1.2705, after credit ratings agency Standard & Poor’s said a ‘no-deal’ Brexit would be likely to tip Britain into a recession on Tuesday” (source: Reuters). Markets will closely follow the BOE`s monetary policy meeting later this week in search of clues on the future interest rate trajectory.

Our Range for the day:  R14.5500 - R14.7500