DAILY COMMENTARY - 23rd AUGUST 2018 | Merchant West


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

USD / ZAR 14.4268 - EUR / ZAR 16.6874 - GBP / ZAR 18.5872 -

Economic Events:

23 August: EC Germany PMI Data ;Euro Zone PMI Data - US Initial Jobless Claims -EC Consumer Confidence Figures

24 August  : US Durable Goods Orders

Market Commentary:

Yesterday was another good day for the Rand (3rd in a row).  It’s been a good week so far, with the pullback actually starting already sometime midday Friday after we tested 15.0150 earlier that morning.  Of course still far too early to get excited, with many rather pressing concerns still hanging over us, with the land reform issues, without question, being a major one of these.

We started yesterday in the mid 14.30’s (a good 15c better than our Tuesday start), went on to test 14.4450 and stayed in this region for the first one or two trading sessions of our local morning, but it didn’t take long before we found traction and found offshore traders buying back into the Rand. By late afternoon as local markets were closing, the lower 14.20’s were being tested and it comes as no surprise this morning to see that we did test as low as 14.1425 and closed in N.Y. only a pip or two higher at around 14.1550. We’ve corrected slightly in the early morning of Asian trade, which does make some sense and may indeed have a little something to do with President Donald Trump’s tweet of last night.

Trump Tweeted:- “ I have asked Secretary of State @SecPompeo to closely study the South Africa land and farm seizures and expropriations and the large scale killing of farmers. “South African Government is now seizing land from white farmers. @TuckerCarlson @FoxNews

This is very likely going to make the world stand up and take notice - For many the land reform issues here in S.A. are just far away news in a far-away land, but “now” with Trump himself showing some interest, the world is going to sit up and pay attention and it sadly might not be the best thing for our poor fragile currency having so many sets of eyes staring directly at us!!

Yesterday did however see President Ramaphosa’s comments in parliament on the land reform offering at least some short-term relief to the Markets. Ramaphosa did his best to calm fears through his Q&A session and did indeed have a fair amount of constructive comments to make which summarised, were as follows:-

  1. He categorically distanced ANC policy from EFF policy of nationalization.
  2. Ramaphosa added that he supported the notion of attaching title deeds to land reform efforts.
  3. The first land to be targeted would be state-owned land including that belonging to municipalities and possibly SOEs where applicable.
  4. The changing of the constitution would be aimed at clarifying and specifying under what conditions land would be expropriated which may even have the effect of strengthening property rights when that specificity is understood.
  5. Government is not seeking to disrupt productive land, they will be targeting unutilised, fallow land where applicable.  (ETM Analytics)

On the Local Data Front - SA CPI surged to 5.1% y-o-y in July, from 4.6% in June, pretty much in line with consensus. Goods price inflation rose to 5.3% y-o-y, from 4.2% previously, services inflation was marginally higher, with administered price inflation showing the biggest upside (rising to 12.4% y-o-y, from 8.3% in June).

The outlook is still a “dovish” one in relation to the SARB and any interest rate decisions. Given the recent weakness in the rand exchange rate and petrol price increases, an expected inflation forecast of 4.6% in 2018, rising to 5.3% in 2019 seems to still be in play and we expect to still see the forecasted “flat” interest rate cycle over the next 12 months remaining intact, with if anything a bit more upside pressures having now crept in.

On the International Data Front - The US Fed released their minutes last night where they (as expected) pointed to further rate hikes this year. The Fed is optimistic on real growth currently and in the near-term, but pessimistic on potential growth in the long run, and is worried about having sufficient tools to cushion the economy in the next downturn, and also remarked that the trade wars have not yet been fully understood.

For now, there will be growing investor concern as the market digests President Trump’s tweet and questions the possibility of sanctions on the country. Turkey’s Contagion and emerging market concerns have taken a bit of a back seat this week, with the Lira recovering some lost ground and flirting around the 6.0500 mark against the USD.

Our Range for the Day     :      14.20     -    14.60