Daily Commentary - 18 January 2018

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

- USD / ZAR 12.3150 - EUR / ZAR 15.0334 - GBP / ZAR 17.0414 -

Economic Events:

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

19 Jan : US University Michigan Sentiment

Market Commentary:

On the Domestic front:

The Rand - South Africa's rand weakened on Wednesday, giving back gains that lifted it to its firmest level in 2-1/2 years as caution crept back into the market and some investors held off extending long positions. At 16h30 the rand was 0.26 percent weaker at 12.3025 per dollar compared to its close overnight in New York, although it pared some losses to 12.2875/$ after retail sales data for November showed its largest increase in five years. "Notwithstanding the positive retail sales surprise, growth is still weak, below potential. This is reason enough for the SARB to lend some near-term support to growth, and cut the repo rate in January," said Razia Khan, chief economist for Africa at Standard Chartered. "Today's figures suggest that consumer spending will make a strong contribution to economic growth in the fourth quarter," said Nedbank Group economic analysts in a note referring to the retail sales numbers.

Retail Sales - South African retail sales rose by 8.2 percent year-on-year in November, beating expectations by far, after increasing by a revised 3.5 percent in October, data from the statistics office showed on Wednesday. Analysts polled by Reuters had forecast a 3.1 percent year-on-year increase in retail sales in November. On a month-on-month basis, sales were up 4 percent and rose 5.9 percent in the three months to November compared with the same period last year, Statistics South Africa said. The statistics agency said the year-on-year figure was the largest jump since June 2012.

SARB – There could be a possible cut in interest rates by 25 basis points today, the forward markets showed on Wednesday, as the rand currency continues its rally and political tensions ease. Forward markets were pricing-in a 56 percent chance of a 25 basis points (bps) cut to benchmark rates, with the probability of a cut by the same margin in March at more than 90 percent. The one month contracts were calculating a 30 percent chance of a 50 bps cut and about 20 percent probability of a reduction larger than that.

It is a sharp turnaround considering markets were penciling-in a 25 bps increase ahead of the SARB's November decision to keep rates unchanged at 6.75 percent.  At that meeting governor Lesetja Kganyago cited the weak rand and its susceptibility to political risks among the reasons the committee had exercised caution and decided against reducing rates again after a cut in July.  Since that meeting, the rand has gained about 16 percent against the dollar to its strongest in nearly three years, with most of those gains made after Cyril Ramaphosa, viewed as business friendly and pro-reform, was elected head of the ruling African National Congress (ANC) in December.

"The entire curve is inverted with markets pricing in dovish bias throughout following the strong rand recovery on the back of the ANC elective conference," said Halen Bothma of ETM Analytics. "Upside risks which the SARB had been concerned about in November have now receded," said research analyst at Nedbank Reezwana Sumad. "Interest rate hikes do not feature for at least the next two years." In November the bank said its forecasting model implied three rate increases of 25 basis points each by 2019, but Kganyago stressed this did not mean an unconditional commitment to the model and decisions would be data dependent.


International Data front:

Euro Zone CPI - Cheaper phone calls, clothes and vegetables slowed consumer price growth in December as expected despite more expensive fuel and cigarettes while the core inflation measure watched by the European Central Bank was stable, data showed on Wednesday. The European Union's statistics office Eurostat said consumer inflation in the 19 countries sharing the euro was 0.4 percent month-on-month in December and 1.4 percent year-on-year, down from 1.5 percent in November.

EUR/USD - The euro nursed losses on Thursday, having pulled back from a three-year high as concerns voiced by European Central Bank officials this week dampened the currency's momentum. The euro's decline helped stabilise the greenback, which has come under pressure as central banks of other major economies begin to move toward tighter monetary policy amid a more synchronised global recovery. The euro last stood at 1.2197 against the greenback, up 0.1 percent on the day but well below a peak of 1.2323 set on Wednesday, the euro's strongest level since December 2014.

The common currency slipped on Wednesday as ECB policymaker Ewald Nowotny told reporters the euro's recent strength against the dollar is "not helpful," which encouraged a bout of profit-taking before a policy meeting next week. In an interview with an Italian newspaper Vitor Constancio, the ECB vice president, said he did not rule out that monetary policy would still continue to be "very accommodating for a long time".Given the way the euro had surged after breaking above 1.20, it was only natural for ECB officials to address the pace of the euro's rise, said Roy Teo, investment strategist for LGT Bank in Singapore. There could be some profit-taking and consolidation in the euro ahead of the ECB's policy meeting next week, Teo added, although the currency's outlook over 2018 looks positive. "We see upside risk towards 1.30 by the end of this year... It's surprising to note that growth in the euro zone is actually similar if not outpacing the U.S (Reuters)

Our range for the day : R12.19 - R12.42