Daily Commentary - 24 August 2018

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

USD / ZAR 14.3193 - EUR / ZAR 16.5572 - GBP / ZAR 18.3757 -

Economic Events:

24 August  : US Durable Goods Orders

Market Commentary:

That the ZAR responded negatively to the tweet is more coincidence than true. It is another mischaracterisation by the press which missed the most obvious driver of the ZAR depreciation which was quite simply, a surge in the USD. That it coincided with the tweet has led to misdiagnosis. As such, we would urge investors to reconsider their perspective on USD-ZAR if it is currently based on Trump's tweet. If it is, the effects will not last as any responsible assessment of SA would reveal that the tweet was off the mark.

USD-ZAR for the time being remains more a function of the USD than it does domestic developments which through the course of the past week have been more positive than negative. It has been a better week for the ZAR as emerging market volatility subsided, but we remind readers that Turkey's markets reopen next week and could well dent EM sentiment once more. Heading into the weekend the USD-ZAR will likely finish off with a more consolidative tone in anticipation of the weekend where some comments from the central bank Jackson Hole Symposium will likely flow and the week to come. Following yesterday's USD-ZAR gains, a more neutral stance is favoured today.

It has gone unnoticed by the local press, but President Ramaphosa penned an article published in the FT where he tries to build healthy context to land reform, why it is necessary and the "responsible" manner in which the state plans to go about unleashing economic potential. In it, Ramaphosa targets the issue of arbitrary expropriation of all farm land, the destruction of property rights and a clear indication that land grabs are not government policy. It is quite clearly a response to the Trump tweet and goes a long way to formally clarifying many misconceptions, although investors will still want to see how this is ultimately implemented before passing any judgement. The point however, is that the article is well written and aims to defuse what is rapidly turning into a PR nightmare for the ruling party which is now fighting issues of perception rather than focusing on exactly how this will be implemented in a corrupt free and efficient manner.

On the issue of property rights, it is worth reading his explanation. "The proposed amendment would need to reinforce the fundamental principles of the property clause, which, among other things, prohibits the arbitrary deprivation of property and holds that expropriation is possible in the public interest subject to just and equitable compensation. It also says that no provision can impede the process of land reform to redress the results of past racial discrimination." This is a very different position to that of the EFF or any unruly policy that has been feared by many that would ultimately lead to land grabs. It is a more accurate reflection of where this land reform process is morphing to and whilst some might argue that it is an incremental step towards eroding property rights as it still leaves too much open to interpretation that could be manipulated by unscrupulous politicians, the counter argument would be that it is a lot less vague than Section 25 of the constitution as it is currently written.

It would appear that US President Trump's tweet has angered politicians. Whilst President Ramaphosa's office has responded to the "ill-informed" tweet through official channels, EFF leader Malema has adopted his usual combative style telling the US to stay out of SA's affairs. Whilst Trump's tweet was characteristically short on substance, nuance and focused on sensation, one should not dismiss the tweet outright as it contains clues on how the world perceives SA's land reform programme.

Internationally

It appears that the US will now go ahead with imposing tariffs on $200bn worth of Chinese goods while no new talks likely until after US mid-terms.

Narrowing in Libor –OIS spreads is likely due to lower T-bill supply and lower US corporate repatriation .Increased issuance in coming months could see the spread widen. ( Source : Investec)

Our range for the day: R 14.2000 –R14.6000