Daily Commentary - 06 December 2018

Merchant West Capital Markets

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Market Data: 

06 Dec: US Initial Jobless Claims, Trade Balance

07 Dec: EC GDP Data | US Change in Pvt payrolls, University of Michigan Sentiment

Market Commentary: 

Unsurprisingly a range bound ZAR edges slightly higher towards the 14.00 mark as we have touched a high of 13.97 this morning (currently 13.92 – 0.6% weaker since the open). Most EM currencies including the Rand are in the red for the month of December as we are finishing the year on the back foot with a steady USD as the global backdrop dominates investor sentiment in a search for havens. The U.S. will return to markets today which should see a hunt for direction bias as some liquidity comes back into play with EM assets to remain under pressure – the arrest of the CFO of Huawei in Canada with reports of an extradition to the U.S. undermines any trade talks. Expect to see immediate resistance at 14.00 then 14.20 with 13.70 to revert the upside. Domestically we are watching for further headlines on how Eskom wants the government to absorb a fair chunk on its debt as load-shedding will continue to hamper activity (BNP Paribas).                                     

Although today's current account data will be treated as the main data event, readers are reminded that it is fairly historic in that we are already approaching the end of Q4 and the data pertains to Q3. For further perspective the current account balance improved in the second quarter of 2018 with the shortfall compressing to R164bn from a revised gap of R219bn in Q1 (previously R229bn). Moreover, the 3.3% deficit to GDP ratio marked a notable compression from the 4.6% deficit in the previous quarter and is below the 5-year average of around 4%. This suggests that that the economy was in a relatively less imbalanced position than what has been the case in recent years. It is instructive to note that the less pronounced external imbalance, in turn, is currency supportive. Looking ahead, exports are at risk of experiencing some headwinds given the rise in protectionism and signs of a slowdown in global growth whilst the rise in oil prices will have also detracted. The current account data might therefore disappoint today. That being said, one should guard against reading too much into this given the speed at which underlying factors have changed recently. Oil prices for one have retreated off their recent highs and there are some indications that the tensions between the US and China have started to ease. Expectations are rising that some form of a deal will be reached and that the destructive focus on trade wars will abate. One might argue that these are more important than what happened historically several months ago (Investec).

Capturing the attention of many this morning is the expectation that US stocks will be under a great deal more pressure this morning with S&P futures plunging. This effectively continues to correction that began in September and will serve to elevate global levels of risk aversion. For its part, the USD-ZAR is trading comfortably back above the 13.9000 mark and if the rout in equities unfolds, then it is quite likely that the ZAR along with other emerging market currencies will also come under pressure through the trading session. The technical signals had already started to turn against the ZAR. Now there is the deterioration in background sentiment led by the correction in equity markets and the risk posed by the latest current account data. As was the case yesterday, investors will likely prefer trading off a long USD position and anticipating a possible bounce back above the 14.0000 handle. The move however need not be a sustained longer term move and caution is urged in turning too USD bullish at this time (Investec).

Range for the day : 13.75 – 14.05