Daily Commentary - 04 December 2017 | Merchant West

Daily Commentary - 04 December 2017

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

- USD / ZAR 13.6951 - EUR / ZAR 16.2408 - GBP / ZAR 18.4018 -

Economic Events:

04 Dec : No data of real importance

05 Dec : SA GDP - EC GDP - US Trade Balance

06 Dec : SA SACCI Business Confidence

07 Dec : SA Mining Production - US Initial Jobless Claims

08 Dec : US Change in Nonfarm Payrolls - US Unemployment Rate

Market Commentary:

The rand is entering a new month of trading after posting its biggest gain for the year in a very volatile November. South Africa`s creditworthiness has once again attracted attention from international markets as the S&P Global ratings agency downgraded the rand to junk, with Moody`s Investor Services issuing a warning shortly after that they may follow suit. The ratings agencies cited the poor state of public finances and the deteriorating local economy as their main concerns. Moody`s has since announced that they will maintain their current rating at the lowest level of investment grade, and will finalise its downgrade decision in February following the scheduled budget release. However, despite the negative attention from ratings agencies, the hunt for yield has still come out on top. Investors are still considering the rand to be a profitable carry trade, as borrowing dollars to buy the rand provided more return compared to currencies of 22 of South Africa`s emerging market peers. Market participants expect the current trend to persist leading up to the ANC`s elective conference in late December, after which significant movement in the market can be expected.  The following is an excerpt from an article published on Fin24: “For now, risks have been priced into the market and we see the rand sticking around” current levels, said Christopher Shiells, an analyst at Informa Global Markets in London. “The outcome of the ANC conference is the key to what the rand and South African assets will do next year.” Markets favour a win by Deputy President Cyril Ramaphosa over Zuma’s ex-wife Nkosazana Dlamini-Zuma, the other main contender. Still, a victory by Ramaphosa won’t necessarily buoy the rand much, given South Africa’s faltering economy, according to Credit Agricole.

In the US markets, the dollar opened the week slightly stronger as the US senate passed the controversial reforms to the tax bill over the weekend, following extended talks. According to President Donald Trump, the new tax system will fire up the US economy. The Senate’s approval on Saturday moves Republicans and President Donald Trump a big step closer to their goal of slashing taxes in what would be the largest change to U.S. tax laws since the 1980s. The dollar has drawn support on expectations that tax cuts for corporations and the wealthy would stimulate the U.S. economy, and also drive Treasury yields higher, as the government becomes more dependent on debt due to reduced tax income (source: Reuters). Despite the US dollar drawing strength from the passing of the tax bill, political risk remains a reality as the differing tax bills will need to be reconciled between the two houses of congress. "If the legislation gets ratified quickly, there would likely be another dollar bounce, but the longer this drags out, the dollar will probably sell off as political uncertainty has been the greenback's undoing over and over again in 2017," said Stephen Innes, head of Asia-Pacific trading at OANDA. Traders will also keep their eyes on any developments in Washington following a confession by Michael Flynn, White House National Security Advisor, that he lied to investigators probing collusion between the Trump election campaign and Moscow.

In the UK markets, progress has been slow as Britain separates from the European Union. “In focus was a meeting between British Prime Minister Theresa May, EU chief executive Jean-Claude Juncker and his chief Brexit negotiator Michel Barnier on Monday, which will mark the “absolute deadline” for London to deliver “sufficient progress” in its divorce offer as set by European Council President Donald Tusk” (source: Reuters). The UK is hoping to start talks about a free trade agreement but the EU says it will only recommend this can take place when it deems "sufficient progress" has been made on the other issues. The UK voted for Brexit last year and is due to leave in March 2019, but negotiations between the EU and the UK have not yet reached a breakthrough.

Our range for the day : R 13:62 - R13: 80