Daily Commentary - 22 February 2018

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

- USD / ZAR 11.6947 - EUR / ZAR 14.3432 - GBP / ZAR 16.2326 -

Economic Events:

22 Feb : SA PPI data

23 Feb : EC CPI data

Market Commentary:

Yesterday, as markets braced for the delivery of what Finance Minister Malusi Gigaba called "a tough but hopeful budget", the rand held firm despite fears of potential weakening. A high degree of volatility was expected for the local currency from the commencement of what could have been Malusi Gigaba`s first and final budget speech, with many believing the budget will signal an end to the ‘Ramaphosa rally’. However, this was not the case as the budget seems to have been received rather well and more or less in line with expectations, which saw the rand strengthening by nearly 1%. The markets also showed little interest in the CPI data that came out yesterday. CPI came out at 4.4% in January 2018, in line with expectations and down from 4.7% in December 2017. This was mainly due to a drop in the fuel price (source: Fin24). Below is a summary of the key-points in yesterday`s budget speech (source: Reuters):

  • SOUTH AFRICA TO INCREASE VALUE ADDED TAX RATE TO 15 PERCENT FROM 14 PERCENT EFFECTIVE APRIL 1
  • SOUTH AFRICA TO HIKE AD-VALOREM EXCISE DUTY RATE ON LUXURY GOODS TO 9 PERCENT FROM 7 PERCENT
  • TREASURY SAYS TAX PROPOSALS IN 2018 BUDGET TO RAISE AN EXTRA 36 BILLION RAND IN 2018/19
  • SOUTH AFRICA 2020/21 BUDGET DEFICIT ESTIMATED AT 3.5 PCT OF GDP VS 3.9 PCT SEEN IN OCTOBER
  • SOUTH AFRICA 2017/18 BUDGET DEFICIT ESTIMATED AT 4.3 PCT OF GDP, UNCHANGED FROM OCTOBER FORECAST
  • SOUTH AFRICA TO IMPLEMENT A 52 CENTS PER LITRE INCREASE IN FUEL LEVIES
  • TREASURY SAYS MAKES PROVISIONAL ALLOCATION OF 6 BILLION RAND IN 2018/19 FOR DROUGHT RELIEF IN SEVERAL PROVINCES
  • TREASURY SAYS SOUTH AFRICA TO IMPLEMENT LONG-DELAYED CARBON TAX FROM 1 JANUARY 2019

In the US market, the dollar index which tracks the greenback against a basket of six major currencies, rose to a one-week high yesterday. The dollar strengthened after the release of minutes from the US Federal Reserve`s meeting in January, which showed the clear intent of policymakers to further raise interest rates. Inflation data also supported this assumption and three interest rate hikes have been priced in for the 2018 year. The minutes also showed that voting members as well as the wider group of policymakers had upgraded their forecasts for the economic outlook since December (source: Reuters).

In the European market, the euro fell to its weakest level in the last three months as political uncertainty weighs on the common currency. Markets have become fearful ahead of the Italian national election as excess downside risk has become evident. According to an opinion poll done by Reuters, Italy’s general election will result in a hung parliament.

In the UK market, the pound edged up modestly from a one-week low against the dollar on Wednesday, after the Bank of England’s chief economist said interest rates might need to rise faster than markets expect to keep inflation in check (source: Reuters).

Our range for the day : R 11.6000- R 11.8000