Daily Commentary - 01 November 2017

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

- USD / ZAR 14.1177 - EUR / ZAR 16.4399 - GBP / ZAR 18.7608 -

Economic Events:

01-Nov: SA Barclays Manufacturing PMI ; US ISM Manufacturing ; FOMC Rate Decision

02-Nov : SA Standard Bank SA PMI - EC Markit EZ Manufacturing PMI - US Initial Jobless Claims

03-Nov : US Change in Nonfarm Payrolls; Trade Balance ; ISM Non-Manf. Composite

Market Commentary:

South Africa's rand retreated on Tuesday, erasing the previous session's gains despite the country showing an eighth consecutive monthly trade surplus, as dollar resumed its rally following positive employment data and gold prices stumbled.  At 16h45 the rand was 0.78 percent weaker at 14.1800 per dollar compared to close of 14.0700 overnight in New York.  The local unit had traded marginally firmer early in the session but surrendered momentum after U.S. consumer confidence rose to a nearly 17-year high and employment improved, lifting the greenback against and putting emerging assets under strain.

Traders said the rand was suffering short-selling having breached the 14.1570 short-term support and was now poised to fall further.  Data on the day, showing South Africa recorded a trade surplus in September, albeit narrower than August at 4 billion rand, failed to turn the tide against the rand.  Bonds were also weaker with the yield on the benchmark R 186 paper due in 2026 adding 2 basis points to 9.105 percent.  Stocks edged up after again hitting record highs in line with Asian peers such as South Korea, but gains remain constrained by technical factors.

International front:

The dollar edged higher on Wednesday as investors awaited the outcome of the Federal Reserve's policy meeting for clues about future tightening, while the beleaguered New Zealand dollar came roaring back to life on strong jobs data.  The dollar index, which tracks the greenback against a basket of six major rivals, added 0.1 percent to 94.680, though it remained shy of Friday's three-month high of 95.150.  Later today, the U.S. central bank is expected to leave interest rates unchanged.  But investors will be watching for any new indications that the Fed will resume raising rates next month as expected, and the timing of any moves in 2018.  "Market expectations are pretty much in line with the Committee's own projections of one last rate hike this year so there isn't much need for them to wave any flags or otherwise alert people to impending action," Marshall Gittler, chief strategist at ACLS Global said in a report.

Ahead of U.S. employment data on Friday, other figures supported the view that the economy is gaining momentum.  Consumer confidence jumped to a near 17-year high last month, with households upbeat about the labour market and business conditions, which could underpin consumer spending and boost the economy in the final three months of the year.  Other data showed wage growth accelerated in the third quarter.  The euro edged down 0.1 percent against the greenback, trading at 1.1632, still nursing its losses after tumbling to a three-month low of 1.1574 on Friday, a day after the ECB said it will extend its bond purchases into September 2018.  The ECB will also trim its monthly purchases by half to 30 billion euros starting in January, leading investors to bet that it won't begin raising interest rates until 2019.

International data front:

The Commerce Department said on Monday consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 1.0 percent last month after an unrevised 0.1 percent gain in August.  The increase, which also included a boost from higher household spending on utilities, was the largest since August 2009.  Economists had forecast consumer spending increasing 0.8 percent in September.  The data was included in last Friday's third-quarter gross domestic product report, which showed consumer spending growth slowing to a 2.4 percent annualized rate after a robust 3.3 percent pace in the second quarter.

U.S. consumer spending recorded its biggest increase in more than eight years in September, likely as households in Texas and Florida replaced flood-damaged motor vehicles, but underlying inflation remained muted.  Households, however, dipped into their savings to fund purchases last month, pushing savings to their lowest level since 2008.  Against the backdrop of lackluster wage growth, the drop in savings suggests that September's robust pace of consumer spending is probably unsustainable.  "Relying on consumer savings to move the economy forward is not going to last for long," said Chris Rupkey, chief economist at MUFG in New York.

Our range for the day: R14.0500 – R14.2500