Daily Commentary - 12 January 2018

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

- USD / ZAR 12.4224 - EUR / ZAR 14.9730 - GBP / ZAR 16.8201 -

Economic Events:

12 Jan : US CPI Data ; Retail Sales

Market Commentary:

As the rand continues to stay range-bound while eagerly awaiting action from the Ramaphosa camp, it begs the question as to how long the market will be able to underweight the fundamental factors which used to move the local unit in earlier days.  Since Cyril Ramaphosa took over leadership of the ANC in December, the rand has been rallying as markets cheered his appointment.  However, without visible progress or action to fuel the newfound optimism, the sentiment could soon turn more bearish.  The rand has been strengthening over the course of the last few weeks, but has failed to breach some of the technical resistance levels which could prompt further bouts of strength.  Despite the rand appearing overbought on a technical front, political headlines will remain the dominant driver of the rand`s direction over the short-term as the markets speculate on President Jacob Zuma`s future.  Investors should also be cautious when estimating the rand`s fair value, as the ANC leadership change will only cause a deviation in the short-term, with the rand reverting back to intrinsic levels as the hype fades.  The state of the nation address (SONA) due next month will also provide guidance towards the local currency`s future outlook.

In the US markets, the dollar index which tracks the greenback against a basket of six major currencies traded down to its weakest level since September 2017.  The dollar weakness has been largely attributed to the disappointing US producer price data, which could signal accelerated inflation in 2018.  Initial jobless claims has also increased for the fourth straight week, which further weighed on the dollar.

In the European markets, the euro raked in gains as the European Central Bank provided the common currency with much needed support.  Minutes from the ECB meeting suggested that their QE stimulus program could be tapered sooner than expected.  “The single currency rallied on Thursday, after ECB policymakers said in minutes of the bank’s December meeting that they could revisit their communication stance in early 2018, boosting expectations that they are preparing to reduce their vast monetary stimulus program.  Investors took the relatively hawkish statement as a further signal that the ECB will wind down its 2.55 trillion euro ($3.07 trillion) bond purchase scheme this year if Europe’s economy continues to hum along” (source: Reuters).

In other news, “South Africa’s Reserve Bank will leave interest rates unchanged at its January 18 meeting, a Reuters poll showed on Thursday, despite a much firmer rand suggesting further easing could come from the bank” (source: Moneyweb).

On the JSE, the Top40 index traded down 0.65% and the AllShare down 0.62%.

Our Range for the day: R12.2500 – R12.5000