Daily Commentary - 01 February 2018

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

- USD / ZAR 11.8900 - EUR / ZAR 14.7342 - GBP / ZAR 16.8520 -

Economic Events:

01 Feb : US ISM Manufacturing

02 Feb : EC PPI - US Change in Nonfarm Payrolls ; Unemployment Rate

Market Commentary:

Following the slight retracement on Tuesday, the rand continued to gain against the US dollar after drawing strength from a weaker dollar and the release of positive economic data in the domestic market. Despite fears earlier in the week, Eskom`s interim financial results also increased optimism as it became evident that it had already secured 54% of funding needed for the 2017/18 financial year. Market participants have also been looking for clues on the future of President Jacob Zuma, with leaders of the DA and EFF calling for a postponement of the State of the Nation Address (SONA) until he is removed. The SONA is scheduled to commence next week. “There is no decision or instruction to recall him, but there is a debate on what is in the air, the question of what is the best option, better than (the) possibility of impeachment and a vote of no confidence, or we do something different,” ANC chairperson Gwede Mantashe told News24. Local consumer confidence also increased in the final quarter of 2017. “The improvement in consumer sentiment regarding South Africa’s economic prospects correlates with the stronger-than-expected rebound in real GDP growth during the second and third quarters of 2017,” Jason Muscat, senior economic analyst at FNB, said (source: Moneyweb). Despite the rand`s recent strength, it remains a fragile currency and could become very volatile on short notice. The local currency faces numerous risk in the short-term which could see it derail. The political outlook for South Africa has significantly improved, but remains largely based on expectations that are yet to be implemented. The cyclical nature of commodity prices could also prove to be a threat to continued rand strength and dollar weakness could also reverse. Positive investor sentiment could also diminish following the SONA and Finance Minister Malusi Gigaba`s maiden budget speech.

Internationally, central bank policy has historically been one of the leading drivers of currency movements, with the US being no exception. As Janet Yellen exited her role as Chair of the US Federal Reserve, markets expected a more hawkish stance. However, “the dollar was weaker on uncertainty as to how the new management at the Fed under chair Jerome Powell would handle further rate hikes in 2018 in a weak bond-market environment” (source: Reuters). The dollar index, which tracks the greenback against a basket of six major currencies, held steady on Wednesday after the US Federal Reserve kept interest rates unchanged and reinforced views that several interest rate hikes could be expected for the coming year. With Wednesday`s data having caused no significant movements, market participants will now shift their focus to jobs- and payroll data due to be released on Friday.

In the European market, the euro remained relatively flat on Wednesday as investors speculate on when the European Central Bank will put an end to its asset purchases. In the UK market, the “sterling rose against the dollar on Wednesday as the sell-off in the U.S. currency resumed, putting the pound on track for its best monthly performance since May 2009, thanks to dollar weakness and better prospects for a Brexit deal” (source: Reuters).

Our range for the day : R11.8000 - R12.1000