Daily Commentary - 23 May 2018

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

USD / ZAR 12.6604 - EUR / ZAR 14.8670 - GBP / ZAR 16.9449 -

Economic Events:

23 May : EC Markit Eurozone Manufacturing PMI - SA CPI - US New Home Sales ; FOMC Meeting Minutes

24 May : GE GDP - US Initial Jobless Claims - SA SARB Announce Interest Rate

25 May : UK GDP - US Durable Goods Orders ;University of Michigan Sentiment

Market Commentary:

Domestic front:

South Africa's rand staged a modest recovery yesterday, as the dollar retreated after a recent rally. At 17h05 the rand traded at 12.5900 to the dollar, and had in the early hours of trade at one point test 12.49 with the range of the day being between 12.52 and 12.60 for the entire time during our trading hours. The South African currency was around 2.5% stronger than a five-month low struck on Monday, helped by the dollar easing back from its’ equal five-month high. The rand's fortunes have been determined mainly by global market moves in recent weeks, in the absence of major shifts in local economic indicators. A central bank business cycle indicator yesterday is pointing to a slight slowdown in the pace of an economic recovery, but traders said its impact on the rand was minimal.

First-quarter gross domestic product data is expected to be released in early June. Economists polled by Reuters expect the central bank to leave interest rates unchanged on Thursday, while market expectations are for ratings agency S&P Global to leave South Africa's sovereign rating unchanged on Friday. Yesterday stocks ended higher, tracking a upbeat tone in major overseas markets as an easing of pressure on Italy's debt markets coincided with China's latest move to open up its giant economy to the rest of the world.

ZAR insight:

One eye will be on developments in Turkey and how other EM currencies respond. The other will on the inflation reading to offer clues and insight into what the SARB may deliver the market later this week in terms of a decision. Technically speaking, it would appear as though the USD-ZAR has run into some resistance and may struggle to gain significantly more ground. Intra-day, direction is a little lacking following the more bid tone that re-entered the market through the Asian session this morning. Furthermore, with the trade weighted USD now trading in a relatively tight range, momentum in either direction will be lacking (ETM)

International front:

The Institute for International Finance said yesterday that it is worried about the resiliency of emerging markets given how vulnerable the asset class has been to a "moderate rise" in global funding costs. The IIF, a global financial institutions association, said spillover from the sharp depreciation in the Turkish lira and the Argentine peso this year has so far been limited. However, it is worried that the near 20% slide for each currency so far in 2018 has come with an increase of just around 60 basis points in the benchmark U.S. 10-year Treasury note's yield. “This leaves us worried how well the EM complex will digest a continued move higher in global funding costs," the IIF research note said, referring to rising interest rates. On-resident portfolio inflows in the last three years reached over 5% of gross domestic product in various emerging and frontier market countries including Argentina, Colombia, Mexico, South Africa, Egypt and Indonesia.

The emerging market aggregate hovered near 2.5% over the same time period according to the note, meaning the concentration in a few countries could prevent a larger contagion. However, the IIF said, "we remain worried" about spillover because "the underlying driver of the sell-off is this year’s rise in the 10-year Treasury yield from 2.4 to 3.0%". The level of non-resident portfolio flows to emerging markets has rebounded sharply since the selloff that followed the last time the U.S. central bank reversed course on its balance sheet policy in 2013, the so called taper tantrum. That year the benchmark Treasury yield rose more than 100 basis points to end at 3.0%. The Federal Reserve is expected to raise rates 25 basis points in its June meeting, leaving the Fed funds rate at 2.0%t, with at least one more rate hike is priced in this year.

The MSCI emerging market currency index fell as much as 4% on Monday from a record high hit in late March, with us up yesterday by 0.69%, the most for any day since late January. 

Range on the day:  12.50  -  12.73