Daily Commentary - 16 January 2019

Merchant West Business Finance

Merchant West Capital Markets

USD/ZAR 13.7195 | EUR/ZAR 15.6459 | GBP/ZAR 17.6522

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JHB: (011) 305-9500 | PTA (012) 742-8600 | CPT (021) 552-7007 

email: treasury@merchantwest.co.za

Market Data: 

16 Jan SA Retail Sales | US MBA Mortage Applications ; Total Net TIC Flows

17 Jan EC CPI Data | US Housing Starts ; Initial Jobless Claims | SA SARB Intrest rate announcement 

18 Jan EC ECB Current Account | US Industrial Production ; University of Michigan Sentiment

Market Commentary: 

The local unit recovered lost ground ending the session on the front foot at R13.7425 against the greenback, after some initial weakness on the back of a disappointing local mining production reading. (actual: -5.60% y/y, est: 0.50% y/y, prior: 0.75% y/y) and mounting uncertainty ahead of the Brexit vote. With the dearth of local data today, the Rand will take its direction from international headwinds as investors will turn their attention to a vote of confidence on British Prime Minister May's government by lawmakers later in the day along with US CPI data after yesterday's downside surprise in US PPI  (a leading indicator) pointed to a reduced likelihood of the Fed continuing with its pace of rate hikes in the near term (Absa)


Domestic front - South Africa's ruling African National Congress has no intent to tinker with the independence of the Reserve Bank, President Cyril Ramaphosa said, after the party said the bank should broaden its focus to boost employment and economic growth.The South African central bank's mandate now focuses on price stability, but the ANC said in its 2019 election manifesto that monetary policy should also "take into account other objectives, such as employment creation and economic growth".

On Wednesday, Ramaphosa said, "There is no intention whatsoever to tamper or tinker with the independence of the central bank. “The issue that is expressed is that as it goes ahead with its monetary policy machinations and policy decisions, it should also keep an eye on the issue of employment. “The central bank guards its independence and has opposed attempts to alter its mandate, which is enshrined in the constitution. The Reserve Bank has yet to comment on the ANC's remarks in the manifesto released on Saturday. “The governing party is essentially saying we have got a burning platform with regard to employment, and we would like everyone to focus on the creation of jobs. Clearly there is nothing wrong with that," Ramaphosa added.

International front - The pound steadied on Wednesday but remained on the backfoot following a volatile overnight session after British lawmakers defeated Prime Minister Theresa May's Brexit divorce deal by a crushing margin. Parliament on Tuesday voted 432-202 against May's deal, the worst parliamentary defeat for a government in recent British history. Investors' short-term focus is now on a confidence vote on May's government by lawmakers later in the day.

Sterling had sunk more than 1 percent against the dollar earlier on Tuesday but rallied back after the parliamentary vote, with the sizable defeat for May seen forcing Britain to pursue different options. However, there are also worries the outcome might trigger political upheaval that could lead to a disorderly exit from the European Union.

The pound traded a shade lower at 1.2846 against the greenback, caught in a narrow range after gyrating between a low of 1.2670 and a high of 1.2917 during the previous session. “While the margin of May's loss was a surprise, the defeat itself was something the market had been pricing in for a long time and it appears that participants covered shorts in the pound after the vote," said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “The market is now factoring in the March Brexit deadline being extended. In the longer run it may boil down to two scenarios - a no-deal Brexit or no Brexit at all."

"A recovery by U.S. equities and a resulting ebb in downward pressure on Treasury yields will widen interest rate differentials between the United States and other countries. This will be a theme supporting the dollar this year," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

Long-term U.S. Treasury yields dropped to an 11-month low of 2.543 percent at the start of January but have bounced back above 2.70 percent, as the broader equity markets have regained some calm after experiencing a heavy round of risk aversion seen at the turn of the year.

Our Range for today: R13.6000 - R13.9000