Daily Commentary - 08 December 2017

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

- USD / ZAR 13.7149 - EUR / ZAR 16.1160 - GBP / ZAR 18.4966 -

Economic Events:

08 Dec : US Change in Nonfarm Payrolls - US Unemployment Rate

Market Commentary:

Over the last week, the rand displayed significant resilience as it strengthened in the face of a local currency downgrade, with investors placing political factors ahead of macroeconomic factors when making decisions. This has left market participants scratching their heads for answers, with many attributing the occurrence to the “Ramaphosa effect”. Deputy President Cyril Ramaphosa is the current leader in the ANC`s succession race, with markets favouring his business-friendly stance. However, the recent rand strength has come to a standstill on Thursday as the dollar index, which tracks the greenback against a basket of six major currencies, advanced to a two-week high. The dollar found strength in the probability that the controversial tax reform in the US will be implemented without too much resistance. The ANC`s elective conference is set to kick-off on the 16th of December as Cyril Ramaphosa and Nkosazana Dlamini-Zuma face of in the final leg of the succession race. Markets should proceed with caution as the political events unfold, as the outcome could mark the start of a very volatile period for the rand. On the JSE, the weaker rand aided the recovery of resource stocks, with the Top40 index up 0.2% and the AllShare up 0.01%.

In the US markets, overall stronger risk appetite and the aversion of a potential government shutdown has pushed the dollar higher. With the implementation of the proposed tax reforms before the December 22nd deadline becoming increasingly likely, markets will shift their attention to the non-farm payrolls data due to be released today. According to a Reuters poll, investors expect 200,000 new jobs for the month of November. The markets will also focus on the growth in wages, due to its spill-over effect into inflation and ultimately the interest rate trajectory. The data could provide clues on how US monetary policy will be shaped in 2018. Markets have already priced in a 25 basis point increase with a 100% probability, but further guidance could lead to additional strength for the greenback. “Friday’s jobs data is unlikely to make a very large impact on the Federal Reserve’s December decision or the U.S. dollar unless there is a substantially negative deviation from expectations,” said James Chen, head of research at Forex.com in Bedminster, New Jersey (source: Reuters). Emerging market economies and currencies will potentially suffer from higher interest rates in the US.

In the European market, the euro lost ground against the US dollar to levels last seen in late November, with the pound slightly strengthening. The two currencies have been mainly influenced by recent Brexit headlines as Prime Minister Theresa May failed to push through a deal concerning the Northern Ireland border. Despite assurance from the British government that an agreement with the EU is imminent, investors remain cautious. According to a poll by Reuters, currency strategists expect a sharp gain in the pound if Brexit negotiations take a positive turn.

Our range for the day ( Before non-farms): R 13.60 – R13.82