Daily Commentary - 07 September 2018

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

USD / ZAR 15.2178 - EUR / ZAR 17.7057 - GBP / ZAR 19.6859 -

Economic Events:

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

Market Commentary:

South Africa's rand continued to recover early on Friday as a narrowing of the current account deficit helped ease some of the shock of the economy tripping into recession, while profit-taking on the recent slump also aided the currency. At 08h40 the rand was 0.75 percent firmer at 15.2200 per dollar, having reached a session-best 15.1550.  

Emerging Markets - Many emerging market currencies, which have had a torrid few months, will bounce back at least partially against the dollar in a year as weakening growth momentum takes the shine off the greenback, a Reuters poll found. The rand is expected to firm almost 10 percent to 14.00 per dollar in a year, the Brazilian real just over 8 percent to 3.79 per dollar, and the heavily-sold Argentine peso over 10 percent to 34.135 per dollar. "At these (current) levels, a lot of the bad news is priced in," said Mike Keenan, a strategist at Absa Capital. "We think the rand sell-off is probably overdone, even though we acknowledge it is vulnerable to tighter monetary policy conditions globally, twin deficits and an unwind of the carry trade."

Most strategists surveyed in August did not expect such a broad sell-off for the likes of the rand and the real so soon -- or one of such ferocity. “The move happened much faster than I had anticipated. I expected dollar/rand to trade higher, but those levels (came) sooner than I anticipated," said Piotr Matys, currency strategist at Rabobank. In the event of a continued sell-off -- aside from the Argentine peso and Turkish lira -- South Africa's rand and Brazil's real are most at risk, according to a majority of analysts who answered an additional question.

The rand has been resilient most of this year, and during other bouts of selling, compared to other emerging market currencies. Data triggered more weakness for the rand on Tuesday, however, when the statistics agency confirmed South Africa entered recession in the second quarter for the first time since 2009, a bad start for new President Cyril Ramaphosa. Last month's Reuters poll indicated emerging-market currencies were unlikely to rebound from this year's downturn until 2019 and that the search for yield was unlikely to be considered a driving factor for currency trades until then.

Analysts said the likelihood the European Central Bank will start to raise rates next year would tilt interest-rate-differential support away from the dollar, triggering a more meaningful pull back for emerging markets. The storm in emerging markets continued to rage fiercely this week, with the rand in the eye and suffering around a 3 percent fall on Tuesday. Losses since late January for MSCI's 24-country EM stocks index are nearing $1 trillion. The rand clawed back some of its losses on Thursday after data showed South Africa's current account deficit had narrowed to 3.3 percent of gross domestic product in the second quarter. “The main focus, I still believe, remains on the global backdrop, on trade tensions between the U.S. and China, on the Fed, and (the) crisis in other emerging markets like Argentina and Turkey," said Matys.

Argentina's government said on Tuesday it hoped the International Monetary Fund would agree later this month to a deal giving the country more financial support as it seeks to escape a deepening economic crisis. On Monday, President Mauricio Macri announced new taxes on exports and steep spending cuts to eliminate Argentina's primary fiscal deficit next year. The measures are aimed at assuring investors Argentina can pay its debts. “The issue with Argentina is a crisis of confidence. When you are dealing with such a crisis it is extremely difficult to regain confidence amongst investors," Matys said.

Meanwhile in Turkey, both Moody's and Standard & Poor's ratings agencies cut Turkey's sovereign credit ratings deeper into "junk" territory last month, a development that would have likely worried investors in the broader emerging markets. The lira is likely to slide further in a year to 6.82 per dollar from 6.50, the poll showed.

Local data front - South Africa's current account deficit narrowed to 3.3 percent of gross domestic product (GDP) in the second quarter, from a revised 4.6 percent of GDP in the first quarter, central bank data showed on Thursday. The figure was slightly lower than the 3.4 percent deficit analysts polled by Reuters had expected, a boost for the South African economy after data this week showed the economy slipped into recession for the first time since 2009.

US Jobless claims - The Labor Department said on Thursday initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 203,000 for the week ended Sept. 1, the lowest level since December 1969.

The number of Americans filing new claims for unemployment aid fell to near a 49-year low last week and private payrolls rose steadily in August, pointing to sustained labor market strength that should continue to underpin economic growth. The economy so far appears to be weathering an escalating trade war between the United States and China as well as tensions with other trade partners, including Canada, the European Union and Mexico, which have rattled financial markets. This likely keeps the Federal Reserve on track to raise interest rates this month for the third time this year.

"The economy is in overdrive with jobless claims at lows not seen since the 1960s, and this gives the Fed the green light to raise interest rates later this month and take away some of the economy's punch," said Chris Rupkey, chief economist at MUFG in New York. Though there have been reports of some companies either planning job cuts or laying off workers because of uncertainty caused by the Trump administration's protectionist trade policy, that has not yet been reflected in the claims data.

Our range for the day : R 15.0000 - R 15.5000