Daily Commentary - 01 October 2018 | Merchant West

Daily Commentary - 01 October 2018

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

USD / ZAR 14.0819 - EUR / ZAR 16.3408 - GBP / ZAR 18.3796 -

Economic Events:

01 October: SA Manufacturing PMI data, Naamsa Vehicle Sales - US ISM Manufacturing data

02 October: EC PPI data - US Fed's Powell speech

03 October:SA SBSA PMI data - EC PMI data, Retail Sales - US MBA Mortgage Applications, PMI data

04 October: US Initial Jobless Claims, Consumer Confidence

05 October:SA Net Reserves - US Trade Balance, Nonfarm Payrolls

Market Commentary:

Last week ended on a busy note with heaps of data released on Friday that have a material influence on the broader fixed income markets.  It started out with the money supply data which came in stronger than expected.  Both money supply, as well as private sector credit extensions (PSCE) growth, surprised strongly to the upside in Aug.  The pace of growth in M3 money supply accelerated to a fresh YTD high of 6.95% y/y in Aug from 6.00% in Jul, while credit extension growth firmed to levels last seen in mid-2016, increasing to 6.74% y/y in Aug from 5.41% in Jul.  Whilst this would ordinarily raise some potential inflation flags, it is important to note that at current levels of growth, M3 Money Supply and the PSCE are still soft and the growth not yet strong enough to prompt a strong inflationary impulse.

Later in the day, the government finance figures were released.  The monthly budget balance remained in a deficit in Aug, however, the shortfall came in smaller than expected at R7.9bn vs. a R96.0bn deficit in Jul.  The market had pencilled in a deficit of R9.2bn.  Meanwhile, the cumulative deficit value amounted to R131.4bn for the Apr-Aug period of the 2018/19 fiscal year, which compares to a R141.4bn deficit over the comparable period a year earlier implying that there has indeed been some fiscal consolidation and had it not been for such a poor GDP performance, the government's objectives might have been met.  We await to see how economic activity performs in the coming quarters for further guidance.

September proved to be a very good month for the ZAR as it recovered the better part of 4.00% vs the USD.  Through the course of the past week in particular, it performed extremely well and has responded positively to a broader improvement in emerging market sentiment and the recovery in commodity prices.  A quick glance at the performance of these other markets shows that the ZAR has not been alone, although its amplitude has typically been higher than most currencies.  That is however nothing new, that would be quite typical of ZAR behaviour and reflects why it is that the ZAR inherently enjoys higher levels of volatility.

The reasons for the ZAR recovery are however not all international.  On the contrary, there are some good domestic reasons as well.  South Africa’s trade account swung into a R8.8bn surplus in August, recovering from a prior, revised R5.3bn deficit in July and overshooting expectations for a shortfall of R1.8bn.  The cumulative trade balance similarly swung back into a surplus of R2.7bn.  That being said, it remains well below the surplus recorded in the comparable Jan-Aug 2017 period of R39.3bn.  The combination of an increase in export demand of 9.4% m/m, driven mainly by a surge in vehicle and transport equipment as well as chemical products, and softer import demand of -3.6% m/m in Aug, assisted the trade balance return to a surplus in Aug.  Looking ahead, weak domestic fundamentals should continue to supress import demand, albeit that high oil prices continue featuring prominently.

That does not preclude the possibility that the USD-ZAR stages a recovery in the coming weeks.  Any bounce from current levels would be consistent with the technical signals being offered on the daily chart.  However, there does appear to be a change in the emerging market tide that has moved to lend some support to the ZAR such that it could well recover in a more wholesale manner before the end of the year. That has been the view held for some time, the catalyst needed was an environment that would allow emerging market currency value to reassert itself. ( Source : Investec )

Global Markets

The final session for September saw the DXY extend a rally to close above the 50-day SMA for the first time in nearly three weeks.  The index is hovering around 95.20 ahead of the European open on Monday and at the moment it seems as though the dollar can hold on to gains as domestic data continues to point to robust economic activity.  The GBP, meanwhile, is struggling at the moment amidst Brexit concerns, whilst the EUR is also on the defensive as concerns over Italy’s fiscal dynamics appear to be weighing on sentiment.  ( Source : Investec )

Our range for the day: R14.0000 – R14.3000