Daily Commentary - 12 October 2018

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

USD / ZAR 14.4825 - EUR / ZAR 17.7903 - GBP / ZAR 19.1890 -

Economic Events:

12 October: EC Industrial Production - US University Of Michigan Sentiment - SA  Moody's Sovereign Rating Review

Market Commentary:

After an initial favourable reaction to the appointment of former Reserve Bank Governor Tito Mboweni as the new Finance Minister, the rand started drifting again as markets held off in anticipation of the Moody`s ratings announcement, the only major ratings agency to keep South Africa`s debt above junk status with a stable outlook. Considering the local unit`s current trading levels, it might signal confidence that the credit rating will be held constant when Moody`s relay their decision later tonight. Market participants are also entertaining the possibility that Moody`s will delay their announcement until Tito Mboweni delivers his medium-term budget speech, according to an article published by Business Day. The weaker US dollar also gave the rand some breathing room after President Donald Trump took another swipe at the hawkish stance of the US Federal Reserve and global equity markets sunk even further. The Fed`s monetary policy approach and proposed rate hike cycle has been brought into question as inflation data missed market expectations. On the JSE, the Top 40 traded down 1.23% and the All Share down 1.10%.

In the US market, the dollar index which tracks the relative strength of the greenback against other major currencies, traded near a monthly low as US treasury yields and weaker equity markets weighed on sentiment. “A weaker-than-forecast rise in U.S. consumer prices undermined the dollar as traders cut back their wagers on the U.S. Federal Reserve stepping up the pace of its planned rate hikes”. “Fed officials said last month they expected three rate hikes in 2019, and some have said they are open to a rate increase in December, which would be the fourth this year” (source: Reuters). The CBOE Volatility Index (VIX), a measure of fear in the market, is indicating more potential downside risk. The recent downturn has been attributed to a variety of factors and could weigh on global risk appetite.

In the European market, the euro was one of the biggest gainers on the back of the weaker US dollar. A more upbeat European Central Bank (ECB) meeting also aided the common currency. “The minutes suggested the ECB was on track to normalise its ultra-loose monetary policy this year despite concerns about slowing growth in Europe” (source: Reuters). In the UK market, “Options traders are bracing for bigger swings in the pound as the U.K.’s exit talks from the European Union approach the finishing line. Sterling has gained this month amid speculation the two sides will announce a Brexit divorce settlement next week as leaders edge toward resolving the thorniest issues. But facing a period of intense negotiations and their eventual success or failure, currency traders are buying protection against big swings in either direction from its current level of around $1.32”. (source: Bloomberg)

Our range for the day : R14.3500 -R 14.6500