Daily Commentary - 04 May 2018

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

USD / ZAR 12.6256 - EUR / ZAR 15.1120 - GBP / ZAR 17.1229 -

Economic Events:

04 May : US Non-Farm Payrolls

Market Commentary:

Local Front:

South Africa's rand strengthened yesterday  as the U.S. Federal Reserve avoided a hawkish tone at its latest monetary policy meeting, while stocks slipped. At 17h20 the rand was 0.2 percent firmer at 12.6800 per dollar, after earlier trading as much as 1.1 percent stronger versus the U.S. currency. The rand gained in line with other emerging markets, which saw a relief rally as the Fed kept rates unchanged and did not signal that it was set to quicken the pace of rate hikes. "Because we didn't see a hawkish tilt from the Fed, the rand is recovering on the back of that," said Halen Bothma, an analyst at ETM Analytics. The rand struck its lowest against the dollar in more than four months on Wednesday, after several weeks of losses that have erased all of the gains since Cyril Ramaphosa was elected leader of the ruling African National Congress in December.

Investor sentiment towards South Africa improved markedly after Ramaphosa was elected ANC leader and replaced scandal-plagued Jacob Zuma as head of state in February. But investors now want to see signs that Ramaphosa will make good on promises to reform the economy. Bothma at ETM Analytics said he expected the rand to be relatively resilient in the coming weeks because of favourable trade dynamics, benign inflation and a pause in rate cuts by the South African central bank.

International Front:

The dollar held steady against a basket of currencies on Friday, having retreated from four-month highs on profit-taking, with the focus on whether U.S. jobs data will provide the spark for another push higher. The dollar has erased all its 2018 losses over the past few weeks on expectations that the Federal Reserve will continue to raise interest rates while other central banks, including the European Central Bank, take longer to reduce stimulus. Additional dollar gains will likely depend on data showing a further improvement in growth and inflation, which could fan speculation that the U.S. central bank will raise interest rates this year three more times.

The dollar's index against a basket of six major currencies held steady at 92.417. That was down from a peak of 92.834 set on Wednesday, the greenback's strongest level since late December. The dollar index has climbed more than 0.9 percent so far this week, putting it on track for a third straight weekly gain.

The Fed held interest rates steady on Wednesday and expressed confidence that a recent quickening in inflation to near the central bank's target would be sustained, leaving it on track to raise borrowing costs in June. Some analysts interpreted the Fed's comments on inflation as a signal it may allow price growth beyond its target, a stance that would limit the need for it to embark on a more aggressive path of tightening.

Friday's employment report for April will be evaluated for further indications of the strength of the U.S. labour market and inflation pressures. “Any slowdown in the pace of wage growth should re-energise dollar bears," Christopher Wong, senior FX strategist for Maybank in Singapore, said in a note. Key support for the dollar index lies at its 200-day moving average, which is now near 92, Wong added. Nonfarm payrolls probably increased by 192,000 jobs last month, according to a Reuters survey of economists. Payrolls rose by 103,000 positions in March, the smallest gain in six months, which economists dismissed as payback after unseasonably mild weather boosted hiring in February. Average hourly earnings are expected to have risen 0.2 percent last month. That would leave the annual increase in average hourly earnings at 2.7 percent, steady from the pace recorded in March.

If the U.S. data points to solid wage growth, the dollar is likely to rise, especially against the euro, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore."If...wages come out a little bit stronger than expected, I think the euro tests $1.19," Innes said. The euro held steady at 1.1987 against the greenback, staying above a near four-month low of $1.1938 set on Wednesday. The common currency had risen 0.3 percent on Thursday, shrugging off data showing an unexpected slowdown in euro zone inflation, as the dollar's recent rally paused.

International Data Front:

New applications for U.S. jobless benefits increased less than expected last week and the number of Americans receiving unemployment aid fell to its lowest level since 1973, pointing to tightening labor market conditions. Initial claims for state unemployment benefits rose 2,000 to a seasonally adjusted 211,000 for the week ended April 28, the Labor Department said on Thursday. Claims dropped to 209,000 in the prior week, which was the lowest level since December 1969.

The U.S. central bank on Wednesday left interest rates unchanged. The Fed said policymakers expected "economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong." The Labor Department said claims for Maine and Colorado were estimated last week. It also said claims-taking procedures in Puerto Rico and the Virgin Islands had still not returned to normal after the territories were devastated by Hurricanes Irma and Maria last year.

While the claims report has no bearing on April's employment report, which is scheduled for release on Friday, filings for jobless benefits declined during the month. According to a Reuters survey of economists, nonfarm payrolls likely increased by 192,000 jobs in April after rising 103,000 in March.

Our range for the day : R12.5500 - R12.7500