Daily Commentary - 13 February 2019
Merchant West Capital Markets
USD/ZAR 13.7354 | EUR/ZAR 15.5552 | GBP/ZAR 17.7406
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13 Feb - EC Industrial Production | SA Retail Sales | US MBA Mortgage Applications ;CPI Data
14 Feb - SA Mining Production | EC GDP Data | US PPI Data ;Initial Jobless Claims ;Retail Sales | CH Trade Balance
15 Feb - EC Trade Balance | US Industrial Production ; Total Net TIC Flows
A slight pause in the U.S. Dollar upward momentum yesterday saw ZAR claw back some 0.3% of the losses seen this week along with most other EM peers. We are in line with our STEER model at the current 13.74 levels although we have seen three-month implied volatility rise for six straight days towards the 50-day moving average. There were more negative comments by credit rating agencies – this time by S&P which highlighted the ANC’s prescribed asset plan as credit negative; this sent ZAR to a high of 13.84 and we did see some selling of the Euro and the USD at this pop followed by a weak bond auction. We are expecting a continuation of whippy trade in the near term with a mixed focus on price action. Two-way risks persist with a bias on the upside: positive news flow from the U.S./China talks are ZAR positive while Eskom and a ‘weak’ budget speech will weigh-in against the Rand (BNP Paribas).
Economic mismanagement has induced higher yields across the fixed income spectrum and South African's have had rate hikes imposed on them, not by the SARB, but by the government. The opportunity losses of a much weaker ZAR and higher interest rates on GDP growth, job creation, risk premia and credit ratings are massive. The ANC is quite correct, economic sabotage has taken place, but it has been implemented by those in power, not by any sinister third force seeking to engineer a "campaign for disinvestment" as ANC head of the presidency Zizi Kodwa so eloquently phrased it. Those higher rates may be part of the attraction of the ZAR, but they are elevated due to risk, not monetary policy and there is therefore a difference in the attraction that offers (Investec).
Despite a recovery in global risk appetite during trade yesterday, local bonds struggled to recover as load-shedding and the precarious state of Eskom weighed on sentiment. Yields across the curve remained underpinned following yesterday’s surge. Although off their yield highs, bond yields remain elevated, a clear reflection of the significant fiscal risk posed by Eskom which is keeping the premium on local bonds elevated. The upcoming budget will likely steal the limelight as investors look for clues regarding government’s plans to deal with the beleaguered parastatal. The situation at Eskom is a cause for grave concern amongst market participants and local bonds will likely remain under (Investec).
Range for the day: 13.60 -13.90