Daily Commentary - 06 February 2018 | Merchant West

Daily Commentary - 06 February 2018

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

- USD / ZAR 12.1124 - EUR / ZAR 15.0162 - GBP / ZAR 16.9159 -

Economic Events:

06 Feb  : SA SACXI Business Confidence - US Trade Balance

07 Feb : No data of real importance

08 Feb : SA Manufacturing Prod NSA ( y/y)  - SA State of the Nation Address

09 Feb : No data of real importance

Market Commentary:

On the Domestic Front:

South Africa's rand was weaker early on Tuesday, hurt by a broad recovery in the dollar and locally by the political stalemate as the ruling African National Congress (ANC) said it would meet later in the week to discuss the president's future. At 08h40 the rand was 0.16 percent weaker at 12.1450 per dollar compared to an overnight close of 12.1250 in New York. Senior officials of the ANC met on Monday as pressure grew on President Jacob Zuma to step down or for the party to push him out, spurring some short-term gains in the rand. Zuma's scandal-plagued tenure has been seen as a weight on the economy, and the rand has soared to its firmest in over two years as the likelihood of his removal heightened after Cyril Ramaphosa was elected party chief in December.

Analysts said the lack of clarity on Zuma was keeping investors cautious and would dent short-term demand. "This combined with a broad based dollar recovery has the rand on the back foot, and until such time as we have clarity on this, the local unit is likely to remain under pressure, with the 12.00 level likely to provide support," said Nedbank's Reezwana Sumad in a note. Zuma has been in a weakened position since he was replaced as leader of the ANC in December by Cyril Ramaphosa, the deputy president. "The political roulette continues. The market will continue to honour the fact that Ramaphosa has begun taking important decisions in the background," Commerzbank analysts said in a research note. Government bonds were slightly weaker, with the yield on the benchmark 2026 instrument up 1 basis points to 8.510 percent.

South African-listed shares tracked global markets with European indexes opening lower as resurgent U.S. inflation raised the possibility central banks would tighten policy more aggressively than had been expected. "We saw weakness in the U.S last week and that carried on to the Far East, and we carried on from there," said Independent Securities trader Ryan Woods adding that South Africa-listed shares across the board have been soft.

International Currency Front:

The dollar stood tall on Tuesday as a rout in global equities prompted anxious investors to cut exposure to riskier assets and seek shelter in the relative safety of the greenback. The U.S. currency held firm against most of its counterparts, although it slipped against the yen, which is viewed as a safe haven in times of market turmoil due to Japan's current account surplus. The dollar's index against a basket of six major currencies stood at 89.605. Since Friday, when the selloff in equities began in earnest, the index has gained about 1.1 percent. "The global growth backdrop has changed, as 2013 was still a 'divergent' world when Asia export growth was weak," they said in a research note, adding that countries like Thailand have seen a sharp improvement in the current account balance since then.

The U.S. currency was on the back foot as recently as of late January, when the dollar index fell to a three-year trough of 88.438, hurt by a range of factors including concerns about U.S. trade protectionism and perceptions of narrowing yield advantage. It caught a break, however, lifted by Friday's robust U.S. employment report and the punishing sell-off in the recently bullish global equity markets. "We are seeing a big rewinding of positions that had been built up since the start of the year, such as euro longs," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

"The stock market plunge caused by the jump in yields has been the trigger. Investors hurting from the drop in equities are seen trying to limit their losses by selling recently bullish currencies like the euro, which in turn supports the dollar." The euro edged up 0.1 percent to trade at 1.2384 against the greenback, regaining a bit of footing after shedding 0.7 percent on Monday.

International Data Front:

Euro zone businesses began 2018 by increasing activity faster than at any time in well over a decade as new orders surged despite firms raising prices at the steepest rate in almost seven years, a survey showed. IHS Markit's Final Composite Purchasing Managers' Index, seen as a good overall growth indicator for the euro zone, rose to 58.8 in January from December's 58.1 and up from the flash estimate of 58.6.It is now at its highest since June 2006 and well above the 50 mark that separates growth from contraction.

The euro zone emerged as one of the best-performing major economies last year. Forward-looking indicators in the survey suggest that momentum will continue for at least another few months - welcome news for the European Central Bank as it moves to unwind policy."The optimism reflects the strong economic upturn that the euro zone is experiencing, which continues to be broad-based and is set to continue in the months ahead," said Bert Colijn at ING. "Backlogs of work are increasing, job creation is historically very strong and new orders continue to pour in. This makes for a rosy growth outlook."

Our range on the day: 12.00-12.1500