Daily Commentary - 06 September 2018

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

USD / ZAR 15.4400 - EUR / ZAR 17.9652 - GBP / ZAR 19.9474 -

Economic Events:

06 September: SA Current Account Balance - US Initial Jobless Claims ;ISM Non-Manufacturing Index

07 September  :EC GDP data - US Change in Nonfarm Payrolls ;University of Michigan Sentiment

Market Commentary:

Local front -South Africa's slide into recession is a "transitional issue" from which the economy will soon recover, President Cyril Ramaphosa said in comments published on Thursday, repeating promises for a stimulus package to reignite growth. Ramaphosa has staked his reputation on reviving the economy after a decade of stagnation under his predecessor, scandal-plagued Jacob Zuma, whom he replaced in February. But Ramaphosa suffered a major disappointment when data showed on Tuesday that the economy had shrunk 0.7 percent in the second quarter, unexpectedly tipping the country into its first recession since 2009. "All these things that are happening now are transitional issues that are going to pass," Ramaphosa was quoted by local news agency Eyewitness News as saying, in his first comments on the recession shock. "I will be meeting with the business community soon, so that we rally everyone together and pull our country out of the situation that we are in," added Ramaphosa, who was attending a China-Africa summit in Beijing when the data was released.

The rand has slumped more than 5 percent against the dollar this week and government bonds have sold off steeply, also hurt by the turmoil on Turkish and Argentinian financial markets. Several foreign banks have slashed their growth forecasts for South Africa to less than 1 percent this year. In a statement issued on Wednesday, Ramaphosa's party, the ruling African National Congress, said the recession was the result of a "prolonged trend of slowdown in economic growth".  It said there was an urgent need for measures to reverse the economic decline and suggested there could be tax credits for companies which support job creation.

The dollar sagged on Thursday as the pound led a bounce in European currencies, although skittish emerging market currencies and global trade concerns limited the greenback's losses. The Australian dollar also dipped, failing to draw support from slightly better-than-expected domestic trade data. The catalyst behind the dollar's fall was the pound, which spiked after Bloomberg reported on Wednesday that the United Kingdom and Germany were prepared to drop a key sticking point in Brexit negotiations. "The dollar continues to face residual pressure from the buoyant pound amid the latest speculation over Brexit. How long this lift could last remains to be seen, but it is prompting buy backs of other European currencies like the euro and Swiss franc for now," said Takuya Kanda, general manager at Gaitame.com Research.

The dollar may have pulled back but it was expected to stay well supported in the longer term, continuing to garner safe haven bids in the wake of weakness in emerging market currencies."The pound gained but its rise is likely to be temporary. The euro also rose thanks to the pound's bounce, but the currency faces strong headwinds in the form of Italy's fiscal issue and the economic crisis in Turkey," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “And with global trade concerns back at the fore, the dollar stands to benefit from an outflow of funds from emerging markets."

International data front - Euro zone business activity picked up a bit last month, extending a period of solid growth, but a growing global trade war kept optimism in check and suggests the pace may not be maintained, a survey showed. Signs of robust growth and inflationary pressures means the European Central Bank is unlikely to be swayed from closing its 2.6 trillion euro asset purchase programme by year-end. IHS Markit's Euro Zone Composite Final Purchasing Managers' Index (PMI), seen as a good guide to economic health, nudged up in August to 54.5 from July's 54.3, just above an earlier flash estimate of 54.4. Anything above 50 indicates growth. August’s surveys point to quarterly euro zone economic growth of 0.4 percent, matching a forecast in a Reuters poll last month, IHS Markit said. But it also questioned whether the pace could be maintained next quarter. "The composite PMIs were pretty encouraging," said Jack Allen at Capital Economics.

The U.S. trade deficit rose to a five-month high in July, with the politically sensitive gap with China hitting a record high, which economists said could embolden the Trump administration to aggressively pursue its "America First" agenda. The Commerce Department said the trade deficit increased 9.5 percent to $50.1 billion as exports of soybeans and civilian aircraft dropped and imports hit a record high. The trade gap has now widened for two straight months (Reuters)

Our range for the day : R15.2500 - R15.6500