Daily Commentary - 15 June 2018

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

USD / ZAR 13.4101 - EUR / ZAR 15.5114 - GBP / ZAR 17.7396 -

Economic Events:

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

Market Commentary:

Local Front:

Whilst global markets were able to digest and live through the Fed's decision without much disruption, the same cannot be said for the ECB. The fear was always that the soft patch being experienced by the eurozone as well as benign inflation environment would turn the ECB more cautious and that was realised yesterday when the ECB remained very cautious. Whilst confirming that it would end its asset purchase programme by the end of the year, it also highlighted how it would only lift interest rates very cautiously and would likely keep interest rates on hold through the summer of 2019. That was much later than first anticipated, especially in the context of a Fed that is set to hike another two times this year and aiming for 2-3 more next year. The EUR slumped on this news to record one of the worst losses since Nov 2016 and will have further helped unwind stale long speculative positions in the EUR that have been reflected in the CFTC data.

And it was the slump on the EUR that propelled investors to rotate to the USD in a move that saw the greenback gain ground against most currencies, especially emerging markets. After showing signs of staging a retreat, the USD-ZAR immediately jumped higher on the move and has now punched through some key technical resistance around 13.4000 which exposes the pair to another topside move. However, whilst that might all look bad for the ZAR and one could easily come to the conclusion that the ZAR remains exceedingly vulnerable, there are some interesting developments in the bond market that suggest something different.

Portfolio outflows, especially from bonds has been a key feature of why the ZAR has come under pressure. However, interestingly, those portfolio outflows have paused more recently and SA's bonds have started to reflect some resilience, in the face of ZAR volatility. The conclusion that could be drawn (although more proof would ideally be needed) is that investors, some foreign, are starting to see value in SA bond yields at these levels and that the steady drain on portfolio flows that originated from bonds might not be as powerful through the weeks ahead.

One should therefore not automatically draw a line between the developments that have unfolded abroad and an outright collapse in the ZAR. At worst, the ZAR is likely to be part of a basket of currencies that will collectively weaken against the USD. At best, currencies such as emerging markets that have already adjusted weaker through the past two months, might outperform a broad basket of developed market currencies by virtue of the adjustments already made in those markets and the carry attractiveness that they now enjoy. There is still a strong argument to be made for the ZAR regaining its composure through the months ahead and we continue to urge investors to pull back the lens and look at global developments in context and the ZAR's recent behaviour within that context.

International Front:

US Insight: In the session ahead, focus on the data front will rest on the latest Empire manufacturing print and industrial production data alongside the preliminary June Michigan confidence index. The industrial sector has been relatively robust and there have not been any indications that trade developments have affected production. On the consumer confidence front, markets will seek guidance on whether the softening in the index to a 4-month low in May has been sustained, which is unlikely given a still tightening labour market and yesterday’s retail sales data, which smashed expectations.

EU Insight: As expected, the ECB once again kept its monetary policy rates unchanged, with the Main Refinancing Rate at 0.00% and the Deposit Facility Rate at -0.400%. In its statement following the rate reveal, however, things were changed. The ECB now expects to keep buying bonds until December, trimming the level by 15bn a month from September onwards. In terms of maturing debt, it will be reinvested for as long as necessary according to the Bank while rates will remain unchanged at least until the summer of 2019. Source: ETM Analytics (Pty) Ltd

Our range for the day : R13.2000 – R13.4600