Daily Commentary - 07 May 2018

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

USD / ZAR 12.5238 - EUR / ZAR 14.9450 - GBP / ZAR 16.9595 -

Economic Events:

07 May : EC Markit Eurozone Retail PMI

08 May : CH Trade Balance

09 May : SA SACCI Business Confidence - US MBA Mortgage Application ; PPI

10 May : CH CPI  - SA Mining Production ; Manufacturing Production - UK BOE rate announcement - US Jobless Claims  ;CPI

11 May : US University of Michigan Sentiment

Market Commentary:

Last Friday’s US payrolls number disappointed market expectations of 193,000 new jobs by instead came out at 163,000.  However, that did not reverse US dollar gains as the unemployment rate was better than the previous month’s and the consensus forecast of 4.1% and 4.0%, declining to 3.9% — seen as a 17.5-year low.  The greenback was able to stay firm with DXY reaching to new highs for the year at 92.90 before settling back below 92.60.  Area is 50 WMA, flagged as resistance but a higher close on the weekly chart affirms a breakout from the 2016 downtrend.  Squeeze pressures on USD shorts are still evident.  On the week, all the majors clocked losses with likes of BRL and MXN hurt the most with 2% and 3.4% declines respectively.  CFTC data showed the squeeze impacting positioning with the big net longs in EUR, GBP and NZD all getting pared but still being prominent.

Friday was whipsaw for USD-ZAR though with several attempts to re-approach the 12.70 area getting faded and the pair ultimately turning well offered into the weekend back below 12.50.  From the highs of last week around 2% has been shaved off, but cumulatively since the end of Mar the pair is still up over 5%.  Recent price action suggests that the bulk of the positional clear-out is done, but the USD’s uptrend is still embedded and EM sentiment generally cautious even though this has not seemed to be driving substantial local outflows.  ( RMB)

Global developments will continue to drive the US dollar and emerging markets currencies, which took a beating last week as the dollar surged.  North American Free Trade Agreement talks are to resume in Washington today with a push a final deal as contentious issues remain.  CPI will be discussed later this week with an expectation to print 2.5% in April, further widening the gap from that of the Eurozone, which came below expectations.

BOE policy meeting scheduled for Thursday, recent series of disappointing data and a dovish Carney have pegged back any bets of a rate hike to come until at least August.

Back in SA, the SARB has expected inflation to bottom in Q1 and has flagged topside risks from the ZAR and oil prices as already forming part of its forecast for inflation to head back toward the top of the target range in coming years so none of this will be a surprise to them, but it will pressure real rates higher in the market which could lead to portfolio outflows.  April saw the monthly bond flows figure turning to a modest outflow of R308mn.  Daily flow figures have made a cumulative outflow of R150mn so far this month, which is very light by the standards of the annual cumulative inflow of R26.4bn.

Local data is light on releases until later in the week when we get the latest SACCI business confidence reading and the mining and manufacturing production figures for March.  The former measurement declined off its cycle highs notched in the aftermath of President Zuma’s resignation and will be eyed keenly to get a sense of just how much Ramaphoria is cooling off. ( Investec)

Our range for the day: R 12.4500 – R 12.7000