Daily Commentary - 02 October 2018

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

USD / ZAR 14.3215 - EUR / ZAR 16.5267 - GBP / ZAR 18.6261 -

Economic Events:

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:

The Rand traded quite whippy yesterday till the afternoon which was then followed by U.S. Dollar strength and worries that the nation might need to knock on the doors of the IMF should debt levels keep raising causing ZAR to lose some 0.77% for the day at the 14.22 close – we are seeing more of the USD move this morning with the Euro sinking on the back of Italian fiscal uncertainty causing ZAR to breach the 14.30 mark and is currently trading 14.33. More pain for locals as the price of fuel is due to increase once again dampening the mood in the build-up  to the ‘high risk’ events of the medium-term budget (24 October) and Moody’s credit rating scheduled for mid – late October with investors fixated on fiscal reforms. We expect ZAR to be driven by USD strength in the near-term but to remain fragile for the rest of the month.(BNP)       

It’s very noisy in the FX markets at present. There are many cross winds and it is difficult to settle on clear-cut direction. Last week the ZAR performed impressively in the face of a stronger USD, US rate hikes and fragility in some emerging markets. Looking at the confluence of factors this morning, not a whole lot has changed in that there is some good news in the manner in which some emerging market currencies are recovering, but this comes at a same time when the USD is appreciating and domestic technicals are hinting at a technical correction higher with the recent appreciation looking a little too much too soon. (Investec)

One of the positive developments that will remove the risk of "contagion" for the ZAR is that emerging market currencies have been settling down. By contagion, we are referring to the use of the ZAR as a hedging tool by emerging market investors unable to exit existing emerging market positions in key hotspots due to lack of liquidity and/or very unfavourable market pricing. It is a well-known fact that the ZAR enjoys a sophisticated market, good liquidity and is located in a convenient time zone which renders it a good hedging tool in such circumstances. It should therefore be seen as good news that the TRY and ARS are no longer being punished in the manner that they were. It removes a major source of the ZAR selling that has characterised the market in recent months and will lend the ZAR some resilience and stability through the remaining months of the year. (Investec)

Intra-day, there is nothing new in the way of data that might upset ZAR sentiment or prove a catalyst for a broader emerging market correction weaker. That being said, technical analysis reveals that the ZAR is ripe for a correction and whilst that might just be temporary, it might prove disconcerting to many. A technical correction does not however change any of the fundamental analysis above and exports should take advantage of any bout of weakness back above the 14.5000 mark should it materialise. Through the months ahead, the core expectation remains that the ZAR will make a recovery comfortably back below the 14.0000 handle and could even look to test 13.0000 if emerging market sentiment improves considerably. (Investec)

Range for the day: 14.1500 -14.5000