DAILY COMMENTARY - 20 MAY 2019 | Merchant West


Merchant West Financial Services Company

Merchant West Capital Markets

USD/ZAR 14.3677 | EUR/ZAR 16.0368 | GBP/ZAR 18.3248

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JHB: (011) 305-9500 | PTA (012) 742-8600 | CPT (021) 552-7007 

email: treasury@merchantwest.co.za

Market Data:

20 May - EU ECB Current Account | US - Chicago Fed Nat Activity Index | Powell Speaks at Atlanta Fed Financial Markets Conference.

21 May - EU Consumer Price Index | US - Michigan Consumer Sentiment Index

22 May - SA Leading Indicator | CPI | EU - Consumer Confidence | UK - Retail Price Index | US - MBA Mortgage Applications | FOMC Meeting Minutes

23 May -  SA SARB Interest Rate Decision | US - Initial Jobless Claims | New Home Sales

24 May - US Durable Good Orders 

Market Commentary:

The South African rand slipped to its weakest in one week on Friday as escalating trade tensions between China and the United States dragged down demand for emerging markets assets. At 17h40, the rand was 1% weaker at 14.4300 per dollar, its weakest level since May 9, after an overnight close of 14.2875. With soft local economic data in the first half of the week and an escalation in the tariff spat between Washington and Beijing in the second half, the currency has struggled to hold on to gains it made following last week's general elections. Tit-for-tat restrictions, including Beijing imposing higher tariffs on most U.S. imports and U.S. President Donald Trump blocking China's Huawei Technologies from buying vital American technology, have dented investor enthusiasm for risk assets (Reuters.com).

And while the victory of South African President Cyril Ramaphosa's African National Congress (ANC) in parliamentary and provincial polls has been cheered by financial markets, investors are holding fire until he appoints a new cabinet. "Market participants are acutely aware of the apparent fissures within the ANC, which may disrupt attempts at reform. They may reserve judgement and are likely to look out for signposts to confirm the President’s 'mandate'", economists at Sanlam Arthur Kamp said (Reuters.com).

Local interest rate front - South Africa's Reserve Bank will leave interest rates unchanged next week as it manages a tight balancing act between inflation threatening to quicken later this year and a weak growth outlook, a Reuters poll found on Friday. All 30 economists polled in the past four days were unanimous in saying rates would be held at 6.75% on May 23 and through to at least the end of next year, chiming with other central banks which have drawn a line under tightening cycles. "Since the last meeting, there has not been any significant change that would warrant the change in the rate stance hence we do not expect any movement next week," said Isaac Matshego, senior economist at Nedbank. For the rest of the year, there is a higher risk of inflation going higher than going down, with the sharp increase on fuel prices, and we are starting to see pressure on food prices and the rand remains vulnerable." (Reuters.com).

Eskom - South Africa's power utility Eskom said on Friday it had raised 5.2 billion rand ($361 million) through drawdowns against a portion of committed loans, 4 billion rand of which was received from China Development Bank (CDB), and the issuance of domestic bonds. The struggling utility supplies more than 90 percent of the electricity in Africa's most industrialised economy but has a 420 billion rand debt which it struggles to service, poses a threat to the country's credit rating. Eskom said it had secured 52% of its plan to borrow 46 billion rand during the 2019/20 financial year. Eskom had expected to draw down 7 billion rand ($481 million) from a $2.5 billion CDB loan facility by late March, but South Africa's finance ministry said last month that the drawdown had been delayed, meaning a planned bailout had to be brought forward. The company said its liquidity stood at 7.7 billion rand at April 30, 2019 (Reuters.com).

China's central bank will use foreign exchange intervention and monetary policy tools to stop the yuan weakening past the key 7-per-dollar level in the near-term, three people familiar with the central bank's thinking said. “At present, rest assured they will certainly not let it break 7," a source told Reuters. A defense of the 7 level could help boost confidence in the currency and soothe investor fears about a sharp depreciation in the yuan, or renminbi, even as souring trade relations with Washington make competitive devaluation a compelling option for Beijing. “Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out," the source said (Reuters.com).

Range for the day: 14.25 - 14.50