Daily Commentary - 13 June 2018

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

USD / ZAR 13.3878 - EUR / ZAR 15.7232 - GBP / ZAR 17.8705 -

Economic Events:

13 June : SA BER Business Confidence ; Retail Sales - EC Industrial Production - US PPI Data ;FOMC Rate Announcement

14 June : SA Mining Production - EC ECB Rate Announcement - US Retail Sales ; Jobless Claims

15 June: EC CPI Data - US Empire Manufacturing ;TIC flows

Market Commentary:

Local Front:

Another day of hefty losses on the ZAR which now appears to be targeting the 61.8% Fibo retrace level of 13.4000/dlr. It has been a disturbing two weeks characterised by rising volatility, emerging market jitters and portfolio outflows. It followed a period of relative stability where investors thought that SA's more stable fundamentals were assisting the ZAR ignore some of the idiosyncratic developments in the likes of Turkey, Brazil, Argentina, Indonesia and elsewhere. Disturbingly, the ZAR appears to have played catch-up with the month-to-date the worst performance out of 24 emerging market currencies with losses of nearly 5%. Portfolio outflows have been a key feature of this, but the move is beginning to look overdone, especially when one considers the strides that SA has made since December and the reduction in risk that has unfolded.

To recap. ETM's resilience indicator continues to trade near the highs of the past six years. The ZAR Sentiment Indicator did point to a potential period of volatility around about now but is also hinting at a recovery to come through the months ahead. ZAR ranks second out of more than twenty currencies on ETM's Carry Attractiveness Index and valuation calculations show the ZAR to now be undervalued by around 10% to the USD and around 5-7% undervalued on a real effective exchange rate basis. These are not the markings of a currency that deserves to be sold off to the degree that it has and so ETM continues to highlight the dangers of buying USDs on the momentum of this move.

Today focus will shift to data released by the BER in the form of business confidence for Q2 and the latest retail sales data for Apr. The combination of the two will give an update from the Q1 GDP data that disappointed and offer insight into the state of SA's business cycle. From a sentiment perspective, investors will be hoping for some stability to return so that discussions can move past the Q1 disappointment as many will be hoping that the Q2 GDP data does not reveal a second negative reading. For statistical reasons alone that will be difficult, but in real terms, some stronger data will inform investors that the bottom has not fallen out of the SA economy and that confidence levels are indeed more buoyant than they have been for a while, even if that sentiment is not what it was in February and March.

Source: ETM Analytics (Pty) Ltd

International front:

The dollar reached a three-week high against the yen and stood tall against the euro on Wednesday ahead of a Federal Reserve policy meeting that could give clues on how many more U.S. rate hikes there will be this year. The Fed concludes its two-day policy meeting later on Wednesday, at which it is widely expected to hike rates for the second time this year. Market focus is on whether the Fed signals tightening policy four times in 2018, from the three times indicated earlier this year, after the world's largest economy has expanded steadily. The dollar index against a basket of six major currencies inched up 0.09 percent to 93.888, after rising 0.25 percent the previous day. The dollar was 0.25 percent higher at 110.660 yen after brushing 110.68, its highest since May 23. "There are views that the recent emerging markets turmoil could hold back the Fed from quickening the pace of its rate hikes. So the dollar would benefit if the Fed actually signals readiness to hike four times this year," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

The euro was flat at $1.1745 after slipping 0.35 percent overnight. The near-term direction of the euro is likely to be dictated by the Fed session and Thursday's European Central Bank policy meeting. "Expectations were that the ECB will be willing to hasten policy normalisation," Yamamoto at Mizuho Securities said. "However, I believe such expectations are overdone and the meeting could disappoint those hoping for hawkish rhetoric, which would explain the euro's recent weakness." Speculation that the ECB could signal its intention to start unwinding its massive bond purchasing program pushed up the euro to a three-week high of $1.1840 last week, although the common currency has been unable to sustain those gains. "Even if the ECB does sound hawkish, that could raise Italian bond yields by pushing up German yields, ultimately limiting any gains for the euro," said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.

Our range for the day : R 13.1500 – R13.4500