Daily Commentary - 07 February 2019 | Merchant West

Daily Commentary - 07 February 2019

Merchant West Business Finance

Merchant West Capital Markets

USD/ZAR 13.5713 | EUR/ZAR 15.4158 | GBP/ZAR 17.5415

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email: treasury@merchantwest.co.za


Market Data:

07 Feb - UK BOE Rate decision | US Initial Jobless Claims ;Trade Balance 

08 Feb - GE Trade Balance ;Current Account 

Market Commentary:


South Africa's rand fell on Wednesday, in line with broad weakness in emerging market currencies, as the dollar settled near a two-week high after U.S. President Donald Trump's State of the Union speech failed to surprise currency traders. At 17h15, the rand was 0.93 percent weaker at 13.5075 per dollar compared with a close of 13.3825 in New York on Tuesday.

With activity in currency markets remaining subdued following holidays in Asia, the rand struggled to find takers as investors awaited South African President Cyril Ramaphosa's state of the nation speech on Thursday and the annual budget later in the month. "The upcoming weeks are of great importance for South Africa," UBS analysts Tilmann Kolb and Jonas David said in a note. "The State of the Nation Address on 7 February and the budget announcement on 20 February should offer clues as to how the government wants to address the increasing public debt load and strained finances of state-owned enterprises.

International currency front -The dollar is losing some of its appeal, according to strategists polled by Reuters, who said the U.S. currency's fortunes have reversed in line with the Federal Reserve taking a dovish turn on rate hikes. Last year, the dollar outperformed on higher rates and a robust economy. But it had already started turning down before the Fed's policy U-turn last week on worries that the U.S.-China trade war was putting downward pressure on growth. The poll of 70 currency strategists taken Jan 31-Feb 6 showed the U.S. dollar is forecast to give up most of 2018's gains against major currencies over the coming year. Nearly 80 percent of strategists who answered an additional question said the dollar rally has already stalled, up sharply from over 60 percent one month ago.

The remaining respondents who expect the dollar's ascent to continue said better U.S. economic performance versus its peers and a reassessment on rates by the Fed will drive the greenback further. But Fed Chairman Jerome Powell said the case for rate increases had weakened in recent weeks, citing "cross-currents" such as slowing growth overseas and the longest federal government shutdown in history that just ended. That clearly indicates the Fed will adopt a cautious approach this year following four rate increases in 2018, a view held by a majority of economists in a separate Reuters poll. "It seems that the 2018 playbook of the dollar strength – U.S. growth outperformance, continued Fed rate hikes, and tighter liquidity conditions from the balance sheet – is reversing," noted strategists at Morgan Stanley. "Forward-looking U.S. data such as business and consumer confidence suggest a slowing domestic economy, and the shift in Fed rhetoric suggests that rates will be lower and the balance sheet larger than previously thought. This is a recipe for dollar weakness."

International front - U.S. Treasury Secretary Steven Mnuchin said on Wednesday that he and other U.S. officials will travel to Beijing next week for trade talks, aiming to clinch a deal to avert a March 2 increase in U.S. tariffs on Chinese goods. Mnuchin said in an interview with CNBC that the talks he and U.S. Trade Representative Robert Lighthizer led in Washington last week with China's Vice Premier Liu He were "very productive." "Ambassador Lighthizer and myself and a large team are on our way to Beijing next week. We are committed to continue these talks," Mnuchin said. "We're putting in an enormous amount of effort to try to hit this deadline and get a deal. So that's our objective."

President Donald Trump said in his State of the Union address on Tuesday that any new trade deal with China "must include real, structural change to end unfair trade practices, reduce our chronic trade deficit and protect American jobs. “Trump has vowed to increase U.S. tariffs on $200 billion worth of Chinese imports to 25 percent from 10 percent currently if the two sides cannot reach a deal by 12:01 a.m. (0501 GMT) on March 2.

Our Range for today: R13.4000 - R13.7000