Daily Commentary - 20 August 2018

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

USD / ZAR 14.5393 - EUR / ZAR 16.5860 - GBP / ZAR 18.5126 -

Economic Events:

20 August: No data of real importance

21 August: No data of real importance

22 August: SA CPI Data - US Existing Home Sales

23 August: EC Germany PMI Data ;Euro Zone PMI Data - US Initial Jobless Claims -EC Consumer Confidence Figures

24 August  : US Durable Goods Orders

Market Commentary:

The final day of a most insane week saw the rand open in the high 14.60’s, demand for dollars against a backdrop of negative local and international headlines weighing on the local unit , and there was one brief moment where we breached above the 15.0000 level, but did come back a bit in the later afternoon and closing around 14.7900(local time), and continued to strength even further in closing sessions of N.Y. trade ending a week from hell at 14.6390.

Asian trade in the early hours of the morning, were (this time) very subdued and certainly didn’t reflect the same aggressive single sided sell-off approach to the rand as we saw 7 days ago.  Volatility is still very extreme, liquidity still a problem, but over the early hours of this morning we saw just as much activity on either side of the trades.

International markets have also been trading very erratically, EUR/USD trading around the 1.1400 pivot in the later afternoon session on Friday and has now subsequently broken back above this key level, testing levels around 1.1440.  The GBP/USD however found itself being picked up a lot less than what we saw within the Euro, the Pound was only able to record a small recovery from around 1.2710 to 1.2750.

External conditions with the Global Market hunting Dollars, and the extended low liquidity in any high risk currency has resulted in the carry-trade has come under severe pressure, and when markets move as they have in recent days under these low levels of liquidity, it becomes very hard to call a top or bottom, and one can only look back historic to assess how large the current move has been.

For this comparison we turn to the carry-to-risk ratio for the rand, which is simply the carry return (borrow low yielding currency and invest in high yielding currency) on the rand adjusted for volatility. The lower (higher) the ratio, the more attractive (unattractive) it becomes from a carry trade return perspective to invest in the rand. Importantly, from an external environment perspective changes to the carry-to-risk ratio are also influenced by changes in the Global $-Liquidity environment i.e. when the offshore cost of USD is cheap the carry-trade is attractive and when offshore cost of USD is expensive the carry-trade becomes unattractive, the latter is currently the case.

The carry-to-risk ratio for the rand on a risk adjusted basis now looks cheaper than it did just after “Nene-gate” and this ratio is not far off levels last seen during the 2008 Global bank collapse. The fall in the ratio comes not only from a weaker currency, but also from a steep spike in implied volatility. Never the less, this ratio does provide us with an indication that movements in the rand have been extreme and we believe the rand will not remain at current levels on a multi week/month basis. We still look for a pull-back in the rand from these over-extended levels, closer to the 14.50-14.20 region. (Nedbank Capital).

The land reform issues continue to hang over us like a dark cloud, with Global investor clearly still very hesitant to commit and commit properly, and is without question hampering the recovery of the local currency unit.  Ramaphosa will face tough questions in Parliament this week on matters relating to land expropriation, and we all sadly are forced to play at bit of a waiting game, with Markets still very nervous and in desperate need of further clarity, which sadly may or may not ever be totally forthcoming.

Our Range for the Day   :     14.35     -      14.70