Daily Commentary - 19 September 2018

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

USD / ZAR 14.7249 - EUR / ZAR 17.2430 - GBP / ZAR 19.4508 -

Economic Events:

19 September: SA CPI Data - EC ECB Current Account -US Mortgage Applications ;Current Account Balance ;Housing Starts

20 September: US Initial Jobless Claims - EC Consumer Confidence - SA SARB Rate Announcement

21 September: EC Eurozone PMI Data - US PMI Data

Market Commentary:

Market participants are beginning to shift their focus towards the Monetary Policy Committee`s interest rate decision due tomorrow. Although consensus expectations are for interest rates to be kept unchanged at the 6.5% level, the current state of the economy has created significant forecasting uncertainty. Considering that South Africa is technically in a recession, room is limited for any interest rate cuts to support the ailing economy. Rising inflation, a weaker rand and the price of oil has also further complicated the decision. “South Africa’s rand has lost 11% against the dollar since the start of August, pushing inflation expectations to a three-month high. The Reserve Bank has to balance its goal of anchoring price growth close to 4.5% with the needs of an economy that fell into a recession in the second quarter” (source: Moneyweb). According to FNB chief economist Mamello Matikinca, “The Reserve Bank is expected to be far more hawkish in its tone, which could suggest a rate hike at the MPC meeting in November” (source: Fin24). In support of this argument, “Investec chief economist Annabel Bishop believes that a 25-basis point hike will be introduced at the next meeting, as second-round effects of inflation have emerged. Investec has brought forward its forecast that a rate hike will only be introduced in the fourth quarter of the year” (source: Fin24). The rand has also found slight relief as China retaliated against the newly imposed US tariffs, a move that subdued the US dollar and prompted appetite for riskier emerging market assets. “It seems markets are not responding positively to the developments on the trade front and that seems to kind of weigh on the dollar, which has created some scope for emerging markets to gain a little bit,” said Halen Bothma, an analyst at ETM Analytics (source: Reuters).

In the US market, the dollar index which tracks the greenback against a basket of other major currencies, remained relatively flat. However, the dollar came under a bit of pressure as the trade dispute between the US and China escalated yesterday. “China and the United States plunged deeper into a trade war after President Donald Trump levied tariffs on $200 billion worth of Chinese goods, which drew quick retaliatory duties from Beijing on about $60 billion worth of U.S. goods” (source: Reuters). President Donald Trump also made mention of an additional round of tariffs, should China choose to retaliate, which should be considered a major concern for investors. On the monetary policy front, “The Federal Reserve is widely expected to raise interest rates twice more before the end of year, and Fed funds futures are pricing in a further two more hikes next year, instead of just the one priced in at the start of this month” (source: Reuters).

In the European markets, the pound advanced to a multi-month high, and the euro has also maintained its recent gains. This followed increased optimism that the EU and the UK will secure an exit deal before the imminent deadline is reached. Key Brexit figures, including British Prime Minister Theresa May and chief negotiator Michel Barnier, have highlighted progress in reaching a divorce deal that could likely be finalised within the next month.

Our range for the day : R14.65 - R15.00