Daily Commentary - 19 January 2018

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

- USD / ZAR 12.1533 - EUR / ZAR 14.9029 - GBP / ZAR 16.8998 -

Economic Events:

19 Jan : US University Michigan Sentiment

Market Commentary:

USDZAR - South Africa's rand scaled a 2-1/2 year high against a broadly fragile dollar on Thursday, climbing more than 1 percent after the central bank held interest rates steady and the new head of the ruling ANC ramped up his tough talk on graft. At 17h20, the rand was 1.1 percent firmer against the dollar after earlier hitting 12.1525, according Thomson Reuters' data, its strongest level since June 2015.South Africa's central bank kept its benchmark repo rate unchanged at 6.75 percent on Thursday, in line with expectations, saying that risks to inflation were still on the upside despite the recent strengthening of the rand.

Treasury - South Africa's Treasury cannot afford to bail out ailing state-run utility Eskom but will take unspecified action soon to tackle the company's challenges, Finance Minister Malusi Gigaba said on Thursday.Eskom, which supplies virtually all of the power for Africa's most advanced economy, has been embroiled in governance and graft crises and has delayed its interim results, a move that could see trading of its debt suspended on the Johannesburg bourse (Reuters)

International front:

As the week draws to a close, politics is in central focus. There are two big deadlines looming – a potential U.S. government shutdown if a funding bill is not passed by Friday and a vote by the Social Democrats in Germany to begin talks with Angela Merkel on a grand coalition this weekend. With the clock ticking, the U.S. dollar and euro could come under selling pressure as investors take profits or cut their long positions ahead of these key event-risks. If members of Congress fail to a reach a deal or the SPD votes against a coalition, the dollar and euro will fall sharply. The U.S. dollar sold off across the board Thursday on the back of Sen. McConnell’s warning to plan for a shutdown, with some eleventh-hour scrambling, we still believe the GOP will secure enough votes to keep the government running and if we’re right, it should lead to a dollar recovery. But there will only be a bounce if they reach a deal because right now, investors still think that’s unlikely. Softer U.S. data compounded the dollar’s losses with housing starts and building permits falling. The Philadelphia manufacturing index also dropped to 22.2 from 26.2. Jobless claims hit a record low but investors shrugged off the improvement because claims can be very volatile this time of the year due to seasonal hiring. The University of Michigan’s consumer sentiment index is the only piece of U.S. data scheduled for release on Friday so developments in Washington will be the primary focus.

EURUSD -  As the EUR/USD held above 1.22, which is a testament to the amount of bids underneath this key level. As a former breakout point, it is holding firm but whether the pair takes out this week’s high or today’s low will depend on the outcome of SPD vote. Despite the resistance, leaders of the Social Democratic Party believe they will secure enough votes to win approval to move forward with a coalition deal and EUR/USD traders are hoping that’s true because if they don’t EUR/USD will fall quickly and aggressively. ECB officials are growing uncomfortable with the euro’s strength and have begun to jawbone the currency. If we don’t see a pullback early next week, we expect ECB President Draghi to join the chorus of central bankers trying to talk the currency down. Although the account of the last meeting revealed policymakers looking to alter their guidance, between the rise in German yields and the strength of the currency, we don’t expect this change to occur at the ECB meeting next week. The risk of a disappointment makes EUR/USD vulnerable to a correction. However all of that depends upon political developments that are difficult to handicap. This uncertainty should limit a further breakout or breakdown in EUR/USD until the outcomes are known.

(Kathy Lien, Managing Director of FX Strategy for BK Asset Management)

US Jobless Numbers - The number of Americans filing for unemployment benefits fell more than expected last week to the lowest level in 45 years, but the decline likely overstated the health of the labor market as data for several states were estimated. Initial claims for state unemployment benefits dropped 41,000 to a seasonally adjusted 220,000 for the week ended Jan. 13, the lowest level since February 1973, the Labor Department said on Thursday. Claims for the prior week were unrevised.

Our range for the day :R12.0000- R12.2500