Daily Commentary - 15 September 2017 | Merchant West

Daily Commentary - 15 September 2017

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

- USD / ZAR 13.1346 - EUR / ZAR 15.6572 - GBP / ZAR 17.6445 -

Economic Events:

15-Sep: US Retail Sales ;Univ. Of Michigan Sentiment

Market Commentary:

Yesterday , the release of US CPI data exceeded expectations and temporarily forced the rand through its resistance levels to a high of USD/ZAR 13.27. US CPI came in at 1.9% y/y, marginally above the expected level of 1.8%, which helped the dollar regain its footing. The sudden weakening of the rand was short-lived as it slowly retraced losses to end at less than 0.5% weaker. If the US economy maintains the uptrend in inflation, it could provide support to the US Federal Reserve to hike rates in December. The weakening of the rand yesterday was largely attributed to dollar strength, although local data also came in rand-negative.

Markets were disappointed by the news of lower retail sales and negative business confidence on Tuesday, and a wider current account deficit on Wednesday. The second quarter deficit widened by 0.4% (R91bn to R110bn) of GDP, which overshadowed the improved trade surplus, according to SARB`s quarterly bulletin. RMB currency strategist John Cairns said "The weakness on the local factors seems significantly overdone, but we would be cautious in thinking a reversal of this effect would be enough to generate a rand recovery in such a strong dollar environment”.

Markets could expect increased volatility in the rand in light of political factors, pressure from ratings agencies and global risk aversion. In political news, South African President Jacob Zuma’s lawyers conceded in a court hearing that a decision by prosecutors to drop bribery and corruption charges against him in 2009 was irrational, opening up the possibility that they will be reinstated (source: Bloomberg).

“The weakness of the dollar throughout 2017 has been on the disappointment of Trump’s failure to achieve tax reform or fiscal stimulus, but also the concerns over subdued U.S. inflation,” said Richard Perry, market analyst at Hantec Markets, in a note ahead of the CPI release. The stronger US dollar delivered a mixed performance against other major currencies on the back of yesterday`s data releases. More recently, North Korea fired another missile into the pacific ocean over Japan`s Hokkaido island.  While these geopolitical tensions caused some jitters amongst market participants, reactions are expected to fade quickly as the retaliation by North Korea against the newly imposed sanctions were expected.

In UK news, the Bank of England signalled that interest rates could be hiked sooner than expected, helping the pound reach its highest level against the US dollar in the last year. The BOE’s Monetary Policy Committee voted 7-2 to keep the key interest rate at a record-low 0.25 percent, and said some withdrawal of monetary stimulus was likely to be appropriate over the coming months to return inflation sustainably to target. The implied probability of a 25-basis-point-rate increase by November this year rose to 50 percent following the meeting, compared with 40 percent before the BOE announcement, according to MPC-dated SONIA. The euro retreated yesterday by 0.1% to EUR/USD 1.1913, staying below a two and a half year high of EUR/USD 1.2092 set last week. (source: Bloomberg).

Our range for the day :  R 13.0800 – R13.2000