Daily Commentary -13 October 2017

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

- USD / ZAR 13.3739 - EUR / ZAR 15.8200 - GBP / ZAR 17.8077 -

Economic Events:

13-Oct : US CPI ;Retails Sales ;Univ. of Michigan Sentiment

Market Commentary:

South Africa's rand extended gains against the dollar early this morning  as it recovers from a six-week low hit at the start of the week, helped by renewed investor appetite for riskier but high-yielding assets. At 08h39, the rand traded at 13.4200 per dollar, 0.43 percent firmer than its overnight close. The currency had hit a two-week high of 13.4050/dollar in the previous session, its strongest level since Sept. 27. "The trade down to very close to 13.4000 last night effectively completed the technical recovery formation," Nedbank analysts wrote in a note.

The Domestic front:

South Africa's finance minister and central bank governor will head to Washington this weekend to meet ratings agencies and international investors in an effort to boost growth in an economy that is emerging from recession. Yesterday the Treasury said that Finance Minister Malusi Gigaba would use the meetings during the International Monetary Fund and World Bank annual conference to convince investors and ratings firms that the economy was improving. In an interview, Gigaba said that Treasury would fall short of revenue targets it set in February and that it would have to reduce spending and plug the shortfall. "We are in a really tight economic situation," ,adding that he was dealing with a financial and governance crisis at state-owned companies that threatens to trigger deeper credit downgrades. "Another downgrade would be really severe for the economy," he said. All three agencies have warned that low growth and state companies that rely on government bailouts pose significant risks to the country's ratings.

The Supreme Court of Appeal (SCA) in Bloemfontein will hand down judgment in an appeal by President Jacob Zuma and the National Prosecuting Authority (NPA) in the "spy tapes" saga today. The SCA was now  ready to give its verdict after Zuma and the NPA conceded that former NPA boss Mokotedi Mpshe's decision not to prosecute him for corruption charges was irrational. The ruling will be delivered at 09:30 in Court A.

International front:

The dollar steadied in early Asian trading this morning, on track for weekly losses as investors awaited U.S. inflation data to gauge the likelihood that the Federal Reserve will stick to its plan to raise interest rates again this year. The dollar index, which tracks the U.S. currency against a basket of six major peers, was steady at 93.083, but poised to shed 0.8 percent for the week. "There are some encouraging nascent signs that there are building inflationary pressures, but with respect to looking at data points, we must acknowledge that these will be noisy data series," Northey said, referring the effects of Hurricanes Harvey and Irma which battered U.S. cities in recent weeks. The dollar was slightly lower on the day against its Japanese counterpart at 112.25 Yen, on track for a modest weekly fall of 0.3 percent.The dollar got some support versus the Yen on Thursday when media polls showed Japanese Prime Minister Shinzo Abe's ruling bloc could keep its two-thirds "super" majority in an Oct. 22 lower house election, reassuring investors that his "Abenomics" programme of yen-weakening easy monetary policy, fiscal spending and promised structural reforms would continue.

International data front:

U.S. producer prices rose in September as the price of gasoline recorded its biggest gain in more than two years amid hurricane-related production disruptions at oil refineries in Texas. "The strength of the inflation and labor market indicators reported today provide important support to our December interest rate hike call," said Scott Anderson. The Labour Department said its producer price index for final demand rose . The increase was the largest since May 2015 and accounted for two-thirds of the 0.7 percent rise in the price of goods.

A key measure of underlying producer price pressures that excludes food, energy and trade services rose 0.2 percent last month after a similar gain in August. Inflation has stayed relatively low, with the main measure tracked by the Fed retreating further below its 2 percent target in August. Data on Friday will likely show the core consumer price index increasing 0.2 percent in September and advancing 1.8 percent on an annual basis, according to a Reuters survey. Minutes of the Fed's Sept. 19-20 meeting published on Wednesday showed a vigorous debate among policymakers over inflation, with "several" expressing concern that "the persistence of low rates of inflation might imply that the underlying trend was running below 2 percent." Despite tepid inflation, U.S. financial markets have largely priced in a rate increase for December. The Fed has increased borrowing costs twice this year.

Our Range for the day: R13.3200 - R13.5500