Daily Commentary - 14 August 2018 | Merchant West

Daily Commentary - 14 August 2018

Merchant West Business Finance

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

USD / ZAR 14.1025 - EUR / ZAR 16.0909 - GBP / ZAR 18.0489 -

Economic Events:

14 August: SA Mining Production Data - US Import /Export Price Index - GE GDP Data - EU Industrial Production

15 August: SA Retail Sales - US Industrial Production ;TIC Flows

16 August: US Initial Jobless Claims ;Housing Starts

17 August  : EU CPI - US Univ of Michigan Sentiment

Market Commentary:

Local front - There is currently no reason to believe the rand won't "pull back", with the majority of trade for the rest of the year being concentrated in the R13.00 – R14.00 range, say analysts from Rand Merchant Bank Global Markets Research and Sales. The rand's initial weakness on Monday morning does not represent a fair assessment of where it should be trading, they added. However, the local currency has been relatively badly hit, losing 7.5% since last Monday, making it the worst-performing currency after the Turkish lira itself (23%). Speaking to Fin24 via email, RMB's John Cairns and Kim Silberman said "the rand weakness does feel overdone”. “While the rand is usually one of the worst-hit currencies in such periods of risk, its weakness still seems out of line with those of other emerging market risk currencies," they said, noting that over the same period, the Argentinian peso has lost 5.4%, the Mexican peso 3.75%, and the Brazilian real – which often competes with the rand as the world’s most risk-sensitive currency – only 2.3%."The under-performance must/will be attributed to local issues, but while there are enough problems to which to allude, the rand weakness does feel overdone," they said. The morning's initial rand weakness came in very early Asian trade – at around 1:30 SA time, when liquidity would have been extremely thin. "As such, these moves do not represent a fair assessment of where the rand should be trading," they argued. "Asian trade has often seen a very sharp rand overreaction. Think Nenegate, when much was made about a brief rand spike [to R17.80/$] in January 2016." Honeymoon over ? - There was cause for concern, however. According to Cairns and Silberman, the rand's movements are likely to be influenced by further bouts of risk aversion caused by Turkey, meaning action by Turkish authorities in an attempt to stabilise the lira will be important to watch. In Cairns and Silberman's view, Turkish authorities are unlikely to apply "tough medicine" in the form of rate hikes. The rand weakness implies that it has pushed weaker than its long-term PPP (purchasing-power parity) fair value level, they said. But it is also now close to the values of other high-risk currencies measured on the same basis, meaning its outperformance in the early part of the year has been worked away. It also means the rand's "Ramaphoria honeymoon is over", they said, with current nominal levels on the rand similar to those seen before December's ANC National Conference in 2017. "As noted, the rand is again trading as a high beta (risk-sensitive) currency – a contrast to early this year," they explained. "Looking ahead, from a short-term perspective, the key question is whether current contagion becomes self-fulfilling, with fear generating more fear and further sell-offs to an extent that weakness in a broad enough basket of risk assets starts to affect the real economy. We believe that this is unlikely," they said. A bigger question, they added, was why the Turkish lira reacted so violently to US President Donald Trump's tariff threats. "Put differently, is Turkey a leading indicator of underlying structural problems with the global economy? “There is a risk that Turkey is a symptom of global imbalances built up over a decade of abnormally low interest rates and quantitative easing," they said. “The RMB research team's "initial take", they said, was that for now there was no need to change the view that the majority of trade for the rest of the year would be concentrated in the R13.00 – R14.00 range, i.e. that the rand would "pull back". (Fin24)


International front -  The Turkish lira pulled back on Tuesday from a record low of 7.24 a day earlier after the central bank pledged to provide liquidity in response to a meltdown which has unsettled global markets. The lira , which closed at 6.9 on Monday, has weakened 45 percent against the dollar this year, hit by worries over President Tayyip Erdogan's calls for lower interest rates and worsening ties with the United States. The weakness of the Turkish currency has rippled through global markets, with its drop of as much as 18 percent on Friday hitting U.S. and European stocks as investors fretted about banks' exposure to Turkey. The lira also lost almost 10 percent on Monday, but concerns about it eased in Asian markets on Tuesday. It traded in a range of 6.86-6.9441 in Asia

The euro stood near a one-year low against the dollar and the Swiss franc on Tuesday, remaining under pressure as the Turkish lira wobbled on worries that Turkey's economic woes could hit European banks and spread to other emerging economies. Investors are nervous the plunge in the lira could prompt capital outflows from other emerging economies that run a hefty current account deficit and rely on foreign capital. The euro traded little changed at 1.1410 against the greenback, having fallen to a 13-month low of 1.1365 on Monday. So far this month it has lost 2.4 percent.

Investors have rushed to the safe haven Swiss franc, which hit a one-year high of 1.1288 EURCHF on Monday and last stood at 1.1337. The Turkish lira slipped as much as 0.6 percent in early Asian trade on Tuesday to 6.955 per dollar , though it hovered above a record low of 7.24 hit on Monday after the central bank pledged to provide liquidity.

Onshore Chinese yuan, which had retreated roughly 0.7 percent the previous day, falling along with its emerging market peers, was a shade firmer at 6.8851 per dollar. The yuan's bounce was limited following the release of downbeat economic indicators, and it remained in reach of a 15-month trough of 6.8965 set earlier this month. China’s economy is showing further signs of cooling as the U.S. prepares to impose even tougher trade tariffs, with investment in the first seven months of the year slowing to a record low and retail sales softening, data released on Tuesday showed.

"The initial reaction emerging economies usually take in a currency crisis is to dip into their foreign reserves. That means they sell U.S. Treasuries, boosting their yields, which helps to lift the dollar against the yen," said Makoto Noji, chief currency strategist at SMBC Nikko Securities. Already on Monday, Indonesia's central bank intervened to defend the rupiah while India's central bank was seen intervening after the rupee hit a record low. The South African rand also fell more than 10 percent at one point on Monday to hit a two-year low of 15.70 to the dollar, although it later pared much of losses. It last stood at 14.31.(Reuters)

Our range for the day : R13.9000 -R 14.3500