Daily Commentary - 06 November 2017

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

- USD / ZAR 14.2242 - EUR / ZAR 16.5105 - GBP / ZAR 18.6042 -

Economic Events:

06-Nov: EC  Composite and Services PMI ; Euro Zone PPI

07-Nov: EC Retail Sales

08-Nov : SA Business Confidence

09-Nov : SA Mining and Manuf. Production  - US Initial Jobless Claims

10-Nov : US Consumer Sentiment

Market Commentary:

Friday saw the Rand suffer some significant losses across the board. It surrendered around 25 cents against the Greenback and has opened today at 14.24.  A view of other EM currencies suggests that weakness in the Rand was attributed to weakness in Brazil and Turkey as risk appetites are being reassessed as tighter USD liquidity comes into the picture.   It may be news out of Venezuela on Thursday evening that they could unilaterally restructure all their global debts to trigger some pressure in the broader EM bond market space. One hopes this puts to rest once and for all any comparisons that touted Venezuela as a great economic model to follow, such as that suggested by Chris Malikane, advisor to Fin Min Gigaba. Venezuela is a failed state and a clear example of how unsustainable socialism racked by maladministration, political influence and corruption can only translate into disaster. Those seeking to build substance around the term radical economic transformation best look elsewhere for inspiration.

This could be a recurring theme over the next 12-18 months as investors become more cautious in the manner they invest. The Rand of late has become a serial offender in mismanaging its fiscus and the consequences are slowly but surely being understood as any expectation of ZAR resilience starts to fade. With talks of SA debt/GDP ratio being closer to 80% by the year 2021, there is emphasis being put on a drying up of foreign investment. This week is relatively light on data where an emphasis will be put on growth as we see Stats SA release mining and manufacturing data on Thursday where in both sectors, growth was surprisingly strong in the first two months of Q3. The key resistance level in USD/ZAR of 14.3575 should be retested soon, a break of which may materialise in another leg higher to target 14.47 before the value proposition reasserts itself again. Bond outflows through October topper R10bn and nearly R3bn has exited so far this month suggesting that the positional readjustment for the country’s more realistic fiscal position and conservative SARB is ongoing.

US Non-farm payrolls for October added 261K jobs in October, wildly missing expectations of a 331K print. Unemployment however came down 0.1% to 4.1% in September. Average hourly wages also disappointed coming in at 0% m/m in September and could cause the Fed policy makers to maybe  revisit the expected trajectory of US inflation going forward as the tightening labour markets is not translating into higher wages and therefore inflation. The disappointing Friday prints did not sway expectation of a December rate hike and the appointment of a hardly more hawkish Fed chair in Jerome Powell cannot be given credit for the stronger dollar after the NFP data. The stronger dollar is more likely being driven by Dollar bulls as they await more news on the Trumps tax policy and a further June rate hike that is currently sitting at a 65% probability.

Brent Crude Oil has settled at two year highs after the Baker Hughes report showed that oil rigs fell significantly to 729 for 4 out of 5 weeks. This was the first time since May that the US oil rig count was below 730. There has also been a notable decline of oil by OPEC members which has supported oil prices.

Our Range for the Day :-   14.15    -  14.33