Daily Commentary - 22 November 2018

Merchant West Specialised Finance

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

USD / ZAR 13.9300 - EUR / ZAR 15.8847 - GBP / ZAR 17.8112 -

Economic Events:

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:

It is proving to be a good week for the ZAR that now appears more comfortable with the break below the 14.00 handle. A recovery in risk appetite is being given as the reason behind the move, but that does not add up. The ZAR had started to perform well even before global equity markets recovered. In any event, the recovery in equities has been relatively muted and has not translated into any weakness in the USD. Instead, we believe that this is all part of some less visible, background flow related issues that will likely influence the ZAR positively over the next 3-6 months and which have the potential to help the ZAR back to the 13.00 handle or below. The core view remains that the SARB keeps rates on hold today with a weak economic climate offsetting some of the risks posed by the ZAR. As it remains a fluid situation with a high degree of uncertainty, one would have to add that the short to medium term outlook is less stable. However, there is no strong argument to change the rate outlook just yet. That might only change if the depreciation in the ZAR resumes against a backdrop of EM central banks hiking and a fresh bout of risk aversion which at present, is absent.

Asian shares seesawed in cautious trading on Thursday with China extending losses as investors’ worries about slowing global growth in the face of rising U.S. interest rates and trade tensions. The Federal Reserve has stayed on its tightening path after ending seven years of near-zero interest rates in December 2015 that took the Fed funds rate to the current 2.00 to 2.25 percent. Investors expect the Fed to go again in December.

In response to the tightening, the U.S. dollar has outperformed most of its peers this year with its index against a basket of major currencies up almost 5 percent. In comparison the Japanese yen is flat so far in 2018. Marios Hadjikyriacos, analyst at broking firm XM.Com, said the greenback is currently an “all weather currency.” “It can shine both in risk-off sessions given its status as the world’s reserve asset, and on risk-on days as wide yield differentials brighten its carry appeal,” he said. The dollar index eased to 96.566 while the yen paused at 113 per dollar following two straight sessions of losses. US markets will be closed for Thanksgiving.

Prime Minister Theresa May said she would be returning to Brussels on Saturday to hammer out an outline of Britain’s future ties with the European Union after her meeting with the head of the bloc’s executive on Wednesday failed to bridge the gaps. May met European Commission head Jean-Claude Juncker for about an hour and a half to try to win commitments aimed at helping her appease rebels at home opposed to her draft Brexit treaty. “There were some remaining issues which we have discussed,” May said afterwards. “I will be returning on Saturday for further meetings, including again with President Juncker to discuss how we can ensure that we can conclude this process.” As an olive branch to Brexit campaigners in Britain, May was seeking to include their proposed technological solutions to keep the border open on the island of Ireland. The EU has previously dismissed these ideas as unrealistic at this stage. May’s finance minister, Philip Hammond, said Britain’s parliament needed to back her deal or risk either seriously damaging the economy or jeopardising Brexit altogether. “A smooth exit from the European Union - doing this in an orderly fashion - is worth tens of billions of pounds to our economy,” he told broadcaster ITV. The euro rose on hopes that the Italian budget dispute would be resolved even as the European Commission took its first step towards disciplining Italy over its deficit. It was last at $1.1406. U.S. crude futures were last down 8 cents at $54.55 a barrel after hitting a one-year low of $52.77 on Tuesday.

Range for the day: R13.8500 - R14.1500