Daily Commentary - 10 August 2017

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

- USD / ZAR 13.3750 - EUR / ZAR 15.6632 - GBP / ZAR 17.3634 -

Economic Events:

10-August: SA Mining Production ; Manufacturing Production - US Initial Jobless Claims ;PPI Data

11-August: US CPI Data

Market Commentary:

South Africa's rand weakened nearly 1.5% on Tuesday evening after President Jacob Zuma survived a no-confidence vote in parliament by secret ballot with markets reacting almost immediately and sending the unit near a one-month low. By 19h30 the rand had weakened 13.4100 per dollar, having traded as firm as 13.1525 in the session as some participants bought options in the currency to bag profits should the motion fail. "The USD/ZAR immediately jumped higher, to 13.40, and we expect it to keep grinding higher before rand stabilizes," said head of emerging markets at TD Securities, Cristian Maggio". While Zuma's position is becoming increasingly precarious, which could be rand positive going forward, we think it may be too early to look at potential rand appreciation now," Maggio said. The vote was 198 votes in favour of Zuma remaining  vs. 177 votes against, with the African National Congress lawmakers rallied to his support.

If is felt that Zuma’s survival will not impact the country's downgrade-threatened credit rating, the S&P Global agency said yesterday. "Failure of no-confidence vote means status quo remains," S&P's primary analyst for South Africa Gardner Rusike told Reuters. "The situation remains within our base-case scenario which is desirable (for maintaining the current BB+ rating with a negative outlook)" Rusike said, however, that political risks remain elevated, carrying risks for the South African economy. The sizable number of ANC parliament members voting with the opposition, was "unexpected" and showed divisions within the party. That could impact the December 2017 ANC elective conference and perhaps even national elections in 2019.

Rusike also said a proposed near $1 billion bailout of South Africa's national airline, South Africa Airways , was unlikely to cause a further rating downgrade. "This bailout (South African Airways) is taken into account at the level of moderate contingent liabilities," he said. A key issue, especially for South Africa's local currency debt rating, is the recent talk about nationalising the country's respected central bank. Local South African debt still carries an investment grade rank and loss of this could see more than $10 billion flee the country's rand-denominated debt markets. "We do believe that South Africa has a deep domestic debt market and we also believe the central bank is independent and has credibility to implement monetary policy - as well the government's fiscal flexibility." "If either of these factors were to weaken, that is what could potentially result in equalising the foreign currency rating and the local currency rating," Rusike said. "We do believe that it may not be implemented either in the near term or the medium-term."

On the International front:

Asian stocks have turned lower this morning as investors fretted about the simmering tensions between the United States and North Korea, sending Seoul shares skidding to two-month lows even as the previous day's rush into safe-haven assets appeared to slow. Spread betters expected European stocks to follow suit, forecasting Britain's FTSE to open down 0.6 percent and Germany's DAX and France's CAC to start a shade lower. MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1 percent, snapping a brief foray into positive territory early in the day and extended losses from yesterday. “Some investors had wanted reasons to unwind their long positions built up in emerging market equities, and they found an opportunity in the latest bout of Korean tensions," said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo. “At the moment, it is unclear how the Korean situation will play out and that is hampering the markets. But as past incidents involving the Korean Peninsula have shown, the impact on financial markets tends to fade away over a span of few days. “The declines in some Asian bourses, like Japan's Nikkei, were limited after Wall Street shares closed barely lower overnight, trimming losses, as investors appeared to brush off geopolitical concerns. The flight-to-safety into U.S. Treasuries also abated overnight. "U.S. equities managed to cut its losses towards yesterday's close and while the VIX (volatility index) did pop higher, it still remains at an overall low level. Furthermore, the benchmark Treasury yield also climbed away from lows," said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo. “These developments suggest that risk aversion caused by geopolitical tensions in North Asia are temporary in nature, as long as it does not involve military conflict. “The dollar was steady at 110.030 Yen after going as low as 109.560 overnight, its weakest in eight weeks.

Our Range for the Day  :-   13.35  -  13.50