Daily Commentary - 17 January 2018

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

- USD / ZAR 12.3128 - EUR / ZAR 15.0476 - GBP / ZAR 16.9521 -

Economic Events:

17 Jan : Euro Zone Inflation Data - SA Retail Sales - US Industrial Production

18 Jan : SARB Rate Announcement - US Housing Starts ;Initial Jobless Claims

19 Jan : US University Michigan Sentiment

Market Commentary:

On the domestic front:

South Africa is pushing ahead with a plan to offer free university education to students from poor households and will announce funding details in next month's budget, Finance Minister Malusi Gigaba said yesterday.  A government report and the treasury said the plan is unaffordable. Some critics also said the timing of the announcement, which came days before Zuma stepped down as leader of the ruling African National Congress, showed he no longer cared about fiscal responsibility. Gigaba told reporters at a televised briefing in the capital Pretoria that costs estimates had been finalised and the plan would be implemented over eight years.  "The president found himself in an invidious position .... It is about how to manage the process and implement it in a sustainable manner without having to breach the fiscal expenditure ceiling," he said." "If the president had not acted this year to provide some funding it would have resulted in further protests," he said. Since 2015 protests by students demanding free education rocked campuses across the country, disrupting teaching and examinations and culminating in a march to Zuma's offices in Pretoria that saw the president freeze tuition increases.

Emerging Markets:

Emerging market equities powered to their highest in nearly 10 years yesterday as Asian shares reached another record, while the rand firmed to 2 1/2-year highs and China's yuan hovered near a two-year peak."We are seeing a lot of inflows to the EM asset class while the dollar has got weaker and weaker, which is supportive for emerging markets as a whole," said Trieu Pham, a strategist at MUFG. "So far, there has been nothing to change the (bullish) view on EM." In another sign of the sector's health, emerging markets fund manager Ashmore  posted a 7% rise in second-quarter assets under management, boosted by net inflows and investment gains rally extended into some emerging European markets with Hungarian shares up 0.6% and Polish stocks up 0.3%.

Investors have been eyeing reports that the ruling African National Congress party is preparing to discuss whether President Jacob Zuma should step down as head of state. Any sign that Zuma might go early has lifted South African assets are definitely upside risks to the currency due to the rumours, again and again, that Zuma will be removed," said Pham. "Markets have been disappointed in this before, but still the police are targeting (businessmen) the Guptas, and (new ANC leader Cyril) Ramaphosa's focus is on the economy and corruption." China's yuan was also still trading near its strongest in more than two years after surging on Monday, underpinned by the Bundesbank's decision to include the yuan in its reserves the Turkish lira weakened 0.6% towards its lowest in close to a month, pressured by threats from President Tayyip Erdogan to "strangle" a planned U.S.-backed force in Syria.

On the International front:

The dollar fell to a three-year low against its peers on Wednesday, with an earlier bounce sputtering as the euro edged back after shaking off a potentially negative turn in German politics. The dollar index against a basket of six major currencies was 0.27% lower at 90.158 after hitting 90.113, its lowest since December 2014. The dollar index momentarily recovered to 90.826 yesterday after slipping steadily this month on expectations that major central banks would eventually normalise monetary policy. But its rebound dissipated as underlying fundamental expectations that had weakened the greenback so far this year remained intact. "The view held by many market participants is that monetary policies are headed for normalisation across the globe. The dollar is bound to stay weak when such views prevail," said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo. The euro was 0.3% higher at 1.2296 against the greenback, shaking off weakness seen overnight and going as high as 1.2323, its strongest since December 2014.The euro was also weighed on yesterday as members of the centre-left Social Democrats (SPD) in one of Germany's regions voted against talks with Angela Merkel's conservative Christian Democrats (CDU), stoking worries over whether the German chancellor could form a "grand coalition". funds appear to have drawn up scenarios already, in which the ECB begins to taper policy this year. Challenges to the euro would be short-lived if many players stick to such scripts," Ishizuki at Daiwa Securities said.

Our range for the day: 12.2100 - 12.3800