Daily Commentary - 15 November 2017

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

- USD / ZAR 14.3767 - EUR / ZAR 16.9941 - GBP / ZAR 18.9435 -

Economic Events:

15-Nov : SA Retail Sales Constant - US CPI

16-Nov : EC CPI - US Initial Jobless Claims ;Industrial Production

17-Nov : EC ECB's Draghi Speaks in Frankfurt - US Housing Starts

Market Commentary:

Yesterday the National Treasury responded to the Eskom solvency crisis saying that it was working with it and the Public Enterprise Ministry to address the issues that are impacting its liquidity. No clear details were disclosed but an Eskom spokesperson clarified that it won’t request a bailout or an expanded guarantee from government. It is however working on governance issues to unlock private funding. We have in recent months seen SOE’s private creditors boycotting the bond market and threatening to recall loans, putting pressure on the National Treasury to re-shape the organisation’s leadership.

Last Friday, SARB governor, Kganyago, being interviewed after a comprehensive policy speech he gave in New York the previous day, continued to give mixed signals on monetary policy noting that the bank has more monetary flexibility than 3 years ago when inflation was above target and the current account deficit was wider. He said the assumptions from the September MPC no longer hold given a weaker ZAR, higher oil prices and the risk of electricity tariff hikes. More policy certainty was also only seen post the ANC leadership conference. The MPC meeting is scheduled for 21-23 November.

Social media over the last couple of days has been awash with speculation of a possible coup in Zimbabwe. A definitive answer is at this stage is impossible to give. These troubles could however spill over into the rand as was the case in 2001. There have been stories that many of Zimbabweans are rushing to take their money out of the country and a full blown coup would lead to a further rush of refugees. In the long term, South Africa could benefit from a political and economic change in Zimbabwe, but in the short term it could mildly add to rand pressure.

Another point to note, according to a Moneyweb article yesterday, is that the rand has swung so much that it has gone from being a best carry- trade to the worst this year. Except for a few days in early January, the rand’s year-to-date carry return against the US dollar turned negative for the first time in 2017 and is the only currency among 16 major peers to have handed carry trades a loss on a year-to-date basis through to 13 November.

US dollar weakness yesterday brought some much needed relief to the rand. Much better than expected German GDP growth number resulted in EUR/USD jump to 1.18, the biggest daily move seen in this half of the year. Growing frustration over tax reform as some Republicans have thrown Obamacare reform into the same pot, has put the USD under pressure. US producer prices rose more than expected in October, resulting in the biggest annual increase in wholesale inflation in more than five and a half years. This was driven by a surge in the cost of services.

The International Energy Agency said yesterday that it expects global oil demand growth to slow over coming months as warmer temperatures cut into consumption. This could tilt the market back into a surplus in the first half of next year.

Expected range: 14.20 – 14.50