Daily Commentary - 05 November 2018

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

USD / ZAR 14.5242 - EUR / ZAR 16.5671 - GBP / ZAR 18.6320 -

Economic Events:

05 November : SA Business Confidence Index - US PMI Data

06 November: EC PMI Data

07 November: GE Industrial Production - EC Germany CPI Data ; Retail Sales - US MBA Mortgage Applications

08 November: US Initial Jobless Claims ; FED Interest rate decision

09 November: UK GDP Data - US PPI Data ; University of Michigan  Sentiment

Market Commentary:

Domestic front - South Africa's rand extended its rally on Friday, brushing off a solid jobs report from the United States to hit a fresh pre-budget high as domestic developments and a global return of risk appetite gave the currency momentum. On the bourse, shares tracked emerging market stocks higher on hopes the United States and China were mending trade relations, triggering a global surge in risk appetite.

At 17h20 the rand was 0.57 percent firmer at 14.3175 per dollar, a touch softer than its session best 14.2225 reached shortly after U.S. job growth rebounded sharply in October and wages grew by their largest annual gain in nearly a decade. While the Federal Reserve is not expected to raise rates at its policy meeting next week, economists believe October's strong labour data could see the central bank signal a December increase. The rand advanced more than one percent after the data. Bonds also rallied, with the yield on the benchmark 10-year government bond dropping 10.5 basis points to 9.185 percent ZAR186.

"It's been a good couple of days for the rand. It didn't react too well to the budget last week but then the investment summit seemed to help it and so did the axing of the SARS head," said Halen Bothma of ETM Analytics. On Thursday, President Cyril Ramaphosa fired the suspended head of the South African Revenue Service (SARS) Tom Moyane over maladministration of the tax agency. Moyane has denied any wrongdoing. Ramaphosa called a conference last Friday that raised investment pledges, days after the Treasury gave a bleak budget that cut growth forecasts and weakened the rand. Bothma said hawkish signals by the local central bank was keeping yield seeking investors interested.

The Reserve Bank said on Monday it was ready to lift lending rates to tame inflation. In the equities market, the Johannesburg All-share index climbed 1.29 percent to 54,271 points, while the Top-40 index gained 1.45 percent to 47,943 points. Market heavy-weight Naspers closed 3 percent firmer at 2,898 rand. Naspers owns a one-third stake in Chinese technology giant Tencent, which rallied alongside Chinese stocks after the U.S. and China expressed optimism about resolving their bitter trade disputes.

The dollar lost ground against most of its major peers on Monday, as growing expectations of an orderly Brexit bolstered the pound, euro and broader global investor sentiment.  A Sunday Times report that an all-UK customs deal will be written into the agreement governing Britain's withdrawal from the EU cheered investors who sent the pound to 1.3062 against the greenback on Monday, the highest since Oct. 22.

International front: - The dollar index, a gauge of its value versus six major peers, traded marginally lower at 96.45 due to the gains in the euro and pound, which together make up around 70 percent of the index. However, analysts think dollar strength will return as investors shift focus back to expectations for tighter U.S. monetary policy following stronger-than-expected economic data late last week. Analysts see the Federal Reserve on track to raise interest rates in December, followed by another two hikes by mid-2019.Data released on Friday showed that U.S. jobs growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years. "The jobs data has reaffirmed the dollar's strength due to the rates differential factor going forward. The risk is that the markets may be caught surprised by a more hawkish Fed," said Rodrigo Catril, senior currency strategist at NAB.

"The dollar/yen will follow the U.S. 10 year yields higher. We don't see much downside as of now," added Catril. Despite Brexit relief supporting risk appetite in currency markets, the UK's Telegraph newspaper reported that significant hurdles still remain for the negotiation process. The pound retraced its intra-day high in early thin Asian trade, but was up 0.3 percent for the day. It has lost 3.7 percent versus the greenback year to date. The positive sentiment around a smooth Brexit also gave the euro a small bid in early Asian trade. The single currency gained 0.11 percent and changed hands at $1.1396.

Our Range for today: R14.2000 - R14.5000