Daily Commentary - 01 February 2019
Merchant West Capital Markets
USD/ZAR 13.3159 | EUR/ZAR 15.2397 | GBP/ZAR 17.4451
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31 Jan - SA PPI Data | EC GDP Data | SA Trade Balance | US Initial Jobless Claims
1 Feb - EC Markit Eurozone Manufacturing PMI | SA Absa Manufacturing PMI ;Naamsa Vehicle Sales ( y/y) | US Change in Nonfarm Payrolls ; ISM Manufacturing ;University of Michigan Current Conditions
Every morning we come into the office and keep emphasising the aggressive moves since the beginning of the year where we have moved quite a bit in a short space of time but currently there are no signs of slowing down. ZAR completes January over 9% in the green with the next best EM peer being the Russian Rouble at 6.6%. The highs of 13.72 from Monday seem like a long time ago with the week’s lows of 13.24 reached yesterday. We are currently trading at the 13.30 mark – the options market show some two-way directional risk with the probability of 13.00 at 53% and the probability of 13.60 at 60% in the next 30-day timeframe. We saw a rally in the 186’s as well with a 15bp run yesterday to the current 8.56% levels and five-year CDS 15bp higher. Three-month and six-month implied volatility are also on a downward trend in 2019 – falling consistently since the turn of the year. In the immediate future we have the U.S. jobs data, which is largely expected to be a non-event for the failing USD as positioning remains neutral. We will also be on the lookout for the groundwork laid in terms of trade talks between the U.S. and China as high level discussions come to an end.
The Australian dollar, a liquid barometer of investor sentiment toward China, skidded 0.5 percent after the Caixin/Markit index of manufacturing fell to its lowest since February 2016. That was more downbeat than the official version of the index and inflamed fears for the economy. Investor caution is also mounting ahead of U.S. jobs data later in the session with analysts unsure what impact the government shutdown might have had employment. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.2 percent, though that followed a stellar 7.2 percent gain in January. Japan’s Nikkei went flat, while Shanghai blue chips held onto a 0.7 percent gain. E-Mini futures for the S&P 500 eased 0.1 percent and spread betters pointed to a marginally mixed start for European bourses. Stocks had taken heart after U.S. President Donald Trump said he would meet with Chinese President Xi Jinping soon to try to seal a comprehensive trade deal as the top U.S. negotiator reported “substantial progress” in the talks. Beijing’s trade delegation said the talks made “important progress” for the current stage, China’s official Xinhua news agency reported on Friday. The previously upbeat mood was also chilled somewhat by White House insistence that March 1 was a hard deadline for a deal, a failure of which would lead to an increase in U.S. tariffs on Chinese goods.
Equity markets have also been relieved by a change of heart at the U.S. Federal Reserve, which this week surprised many by all but abandoning plans for further rate hikes. Investors responded by pricing in a one-in-three chance that interest rates could actually be cut this year. Yields on two-year Treasuries were down almost 15 basis points on the week so far, which if sustained would be the largest weekly decline since mid-2010. That in turn has been a drag on the U.S. dollar, though it was off its lows on Friday. It was down 0.6 percent so far this week against the yen at 108.85, but found some support around 108.50. Against a basket of currencies, the dollar was a fraction firmer at 95.622 thanks in part to a pullback in the euro to $1.1439. Gold prices hovered just short of nine-month highs supported by the fall in bond yields and expectations for a softer dollar. Spot gold stood at $1,318.44 per ounce, having touched a top of $1,326.30. Oil prices were subdued as the poor China data offset signs major exporters were quickly reducing output in line with a pact to cut supply. (Data sourced from Reuters)
Range for the day – R13.2000 – 13.4500