Daily Commentary - 23 October 2017

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

- USD / ZAR 13.7221 - EUR / ZAR 16.1320 - GBP / ZAR 18.1010 -

Economic Events:

23-Oct: EU Consumer Confidence

24-Oct: EU  PPI   - US PMI (Services)

25-Oct: UK GDP  - SA MTBPS - US Durable Goods Orders ; New Home Sales

26-Oct : SA PPI - EU Interest Rate announcement - US Initial Jobless Claims

27-Oct : US GDP ; Univ. Michigan Sentiment

Market Commentary:

On Friday, the rand led a sharp decline in emerging market currencies. This followed speculation that President Jacob Zuma might give his Deputy President Cyril Ramaphosa the boot, only days after removing his other critics from his cabinet. The market`s nervous response to the political noise put the rand under pressure and saw to the rand losing as much as 2.9% during the course of last week. Zuma’s spokesman told Reuters there was no basis for reports that the president would axe Ramaphosa, but market participants dumped local assets nonetheless (source: Reuters). The rand`s implied volatility against the US dollar is currently sitting at a two-month high. Analysts at German bank Commerzbank advised clients to trade rand assets cautiously in light of the political turbulence and said they expected the local currency to remain under pressure (source: Reuters). Recently the rand has been one of the worst performers amongst its emerging market peers. Despite the prospects of higher interest rates in developed economies weighing on the local currency, the political uncertainty is also not likely to fade any time soon as we head towards the ANC`s December leadership election. “The rand has weakened more than its peers, which tends to indicate that it is domestic factors causing a selloff,” said Halen Bothma, an economist at ETM Analytics. On the JSE, the Top40 traded up 0.15% and the All Share up 0.09%.

In the US markets, the dollar index stood firm on Friday as investors formulate expectations surrounding Janet Yellen`s successor. President Donald Trump indicated in a Fox News interview aired over the weekend that Stanford University economist John Taylor and Federal Reserve Governor Jerome Powell remained among the candidates he was considering. He also said he would make his decision shortly. It will be important to watch the news wires as one of the sources of recent US Dollar bullishness, the improved prospect of the US Congress passing tax reform legislation this year, still isn’t set in stone. "We continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labour market and stabilize inflation around our 2 percent longer-run objective”, said Janet Yellen, Chair of the US Federal Reserve.

In the European markets, the euro`s outlook has dimmed after the outcome of the German election. The power struggle in the German economy has put the euro under pressure last week after the far-right party AfD secured its first parliamentarian seats. Traders seem divided when it comes to the euro's performance in the near term, but point out that the European Central Bank (ECB) will still be the ultimate underlying factor for the currency. "The reaction in the EUR and in the credit markets is predictable, but with the ECB still a powerful force in the European debt markets, the moves are unlikely to turn violent," Stephen Gallo, European head of FX strategy at BMO Financial Group, said in a note. (Source: CNBC).

Our range for the day : R13.80 – R13.65