Daily Commentary - 22 September 2017

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

- USD / ZAR 13.2161 - EUR / ZAR 15.8238 - GBP / ZAR 17.9474 -

Economic Events:

22-Sep: EC Eurozone PMI Data - US PMI

Market Commentary:

South Africa's central bank kept its benchmark repo rate at 6.75 percent on Thursday, defying expectations of a cut based on easing inflation pressures and a sluggish recovery from a recession in the first half of the year. Of 26 economists polled by Reuters, 17 had predicted a 25 basis point cut and one a 50 basis point reduction. The remaining eight predicted a 'hold'. Governor Lesetja Kganyago admitted the decision was tight, with the six-member monetary policy committee split 3-3 on whether to hold or cut, leading to the maintenance of the status quo. However, he said it was appropriate to maintain a "balanced" monetary policy stance, with inflation expectations in Africa's most advanced economy anchored towards the top end of the bank's 3-6 percent target band.

The rand reversed losses against the dollar after the decision, moving to 13.2775 by 15h33. Bonds also gained, pushing yields on the benchmark 2026 bond up 9 basis points to 8.495 percent. Analysts immediately turned their attention to the bank's next interest rate meeting, in November, at which it is expected to ease policy to help pep up the struggling economy. "While we expect the central bank to cut interest rates further, the time horizon in which the Bank can achieve this is relatively short given various macroeconomic risks ahead," FNB chief economist Sizwe Nxedlana said. "Inflation is also forecast to start lifting again from mid-2018 onwards which will constrain the possibility of further policy easing in the second half of next year."

On the International Front:

The dollar buckled on Friday as tensions simmered on the Korean peninsula, though the sharp divergence between U.S. and Japanese monetary policy kept the greenback on track for a winning week against the yen. The dollar index, which tracks the U.S. unit against a basket of six major rivals, fell 0.3 percent to 92.024, still up 0.2 percent for the week and holding well above its more than 2-1/2 year low of 91.011 marked on Sept. 8. The dollar dropped 0.6 percent to 111.83 against the Yen, but was still up 0.9 percent for the week, in which it scaled a two-month peak of 112.725.

"The dollar's move lower was triggered by a reaction to the latest North Korea news, but there was also an element of trading strategy, as people took the opportunity to lock in their profits on a Friday before closing their books ahead of the weekend," he said.

Adding to investors' risk-aversion was S&P Global Ratings' downgrade to China's sovereign credit rating. On Friday, the ratings agency said the country's attempts to reduce risks from its rapid buildup in debt are not working as quickly as expected and credit growth is still too fast. The downgrade weighed on the Australian dollar, which fell to as low as $0.7908, its weakest since late August. China is Australia's leading trading partner and the Aussie is often considered a liquid proxy for yuan.

That contrasted with the Federal Reserve's plan, announced on Wednesday, to begin paring its balance sheet from next month. It also indicated that one more rate increase by the end of the year remains possible. Many investors had expected the Fed to strike a more dovish tone in light of the potential economic impact of recent hurricanes and the persistence of sluggish inflation. "The market is unwinding an overly pessimistic view on U.S. rates, which is the reason that the dollar has bottomed, overall," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities (Reuters)

Our Range for the day: R13.1000 - R13.3500