Daily Commentary - 21 November 2018

Merchant West Business Finance

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

USD / ZAR 14.0210 - EUR / ZAR 15.9485 - GBP / ZAR 17.9156 -

Economic Events:

21 November: SA CPI Data - US MBA Mortgage Applications ;Jobless Claims ;University Of Michigan Sentiment

22 November: EC Consumer Confidence - SA SARB Interest Rate Announcement - US Thanksgiving Holiday

23 November: GE GDP Data - EC Manufacturing PMI - US Markit US Manufacturing PMI

Market Commentary:

Today's CPI reading will be key in determining whether the SARB hikes or not. The SARB has been a serial offender in overestimating inflation through the past two years and there is reason to believe that they will need to once again, lower their inflation forecasts given that inflation is already well below their expectations and likely to drop substantially in the December data given the sharp decline anticipated in the ZAR price of fuel. This itself will likely push inflation back to the mid-point of the inflation target band which raises an interesting dilemma for the SARB. Can they justify a rate hike whilst reducing their inflation forecasts at the same time? That question will become even more difficult to answer should the inflation data once again surprise to the downside. Although the core view remains that the SARB keeps rates on hold at the next meeting with a weak economic climate offsetting some of the risks posed by the ZAR, the probability is shifting. As it remains a fluid situation with a high degree of uncertainty, one would have to add that the short to medium term outlook for rates is no longer as stable as it was. However, the balance of risks still favours an unchanged decision. That might change if a sell-off in EM assets resumes.

The dollar traded firm against major peers on Wednesday, extending overnight gains as investors shunned riskier assets in favour of safe haven currencies on escalating worries about slowing global growth and the U.S.-Sino trade war. With sentiment souring and a global equities rout on Tuesday, risk averse traders sought shelter in the liquid dollar, which climbed from a two-week low hit earlier on Tuesday. “What’s driving currency markets right now are fears of a slowdown in economic growth with safe haven currencies like the dollar and yen likely to benefit,” said Michael McCarthy, chief markets strategist at CMC Markets. The greenback had been under pressure for most of this week as cautious comments by Federal Reserve officials and surprisingly weak U.S. economic data suggested the central bank could slow the pace of monetary policy tightening. The dollar index, measuring performance against six major peers, was steady at 96.82 on Wednesday. The index gained 0.65 percent in the previous trading session. With the Federal Reserve widely expected to raise interest rates by 25 basis points in December, analysts think the greenback could trade with a positive bias in the short term, despite lowering their longer-term rate hike expectations.

The yen traded at 112.91, with the greenback gaining 0.14 percent. The yen hit its highest level this month on Tuesday at 112.29 per dollar before losing steam as dollar bulls took charge. Despite its safe haven status, the yen’s strength has been muted. Analysts suspect this is because Japanese investors have kept their money in U.S. and foreign markets, rather than bring it home. The euro traded with a weak bias at $1.1372. The single currency lost 0.7 percent of its value on Tuesday. Wider confidence retreated on Tuesday as Italian bank shares hit a two-year low and the spread between German and Italian bond yields widened. The British pound was little changed at $1.2786, having lost 0.5 percent versus the greenback on Tuesday. The pound is seen likely to trade sideways until the market gets more clarity on progress in the Brexit deal. The Canadian dollar dropped to a four-month low versus the dollar to trade at 1.3305 as the price of crude fell to its lowest level in more than a year ahead of next month’s OPEC meeting. Canada is one of the world’s top oil exporters. Elsewhere, the Australian dollar, often considered a barometer of risk appetite, staged a slight recovery along with U.S. equity futures, gaining 0.2 percent to trade at $0.7230. The Aussie dollar lost more than 1 percent on Tuesday as global risk sentiment worsened.

Range for the day: 13.95/14.2500 - Bias: Buy signal given, possible bear flag