Daily Commentary - 24 May 2018

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

USD / ZAR 12.4274 - EUR / ZAR 14.5754 - GBP / ZAR 16.6151 -

Economic Events:

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:

South Africa's rand steadied against the dollar in late afternoon trade yesterday, recovering from losses earlier in the session, as a rise in consumer price inflation (CPI) reduced prospects for further interest rates cuts. At 17h15, the rand was trading at 12.5650 against the dollar, not far off its close of 12.5625 on Tuesday, and was clearly showing signs of pushing lower in the overnight. (It had earlier weakened to a session low of 12.7050). "The South African Reserve Bank has acknowledged the favourable trend in inflation and growth in the early months of 2018, lowering the repo rate by 25 basis points in March," said Elize Kruger, an economist at NKC African Economics. The central bank is expected to keep rates unchanged at 6.5% today, according to a Reuters survey of 25 economists.

The focus for markets this week is also on S&P Global Ratings' sovereign ratings review on Friday.

Domestic front:

South Africa's consumer inflation jumped in April as a higher rate of value added tax and a sharp increase in fuel prices wiped away the previous month's dip in prices. Headline consumer inflation quickened to 4.5%  y-o-y in April from 3.8% in March, data from Statistics South Africa . The statistics office said the increase was driven by higher taxes on specific products, part of government's plan to boost falling revenues that have seen the budget deficit widen and raise the risk of credit ratings downgrades.

"Much of the increase was a result of price rises in product groups that attract specific taxes, namely alcohol, fuel and sugary drinks," Stats SA said. "Motorists in particular have felt the pain." Government said in December it would begin collecting a levy of 2.1 cents per gram of sugar on drinks where sugar content is above 4 grams per 100 milliliters. Fuel prices on the other hand have risen by 9% over the past 12 months. The inflation data saw the rand weaken briefly by 1.11% to 12.7050 per dollar before retreating back to its level before the data release.

The Reserve Bank (SARB), which sees inflation above 5% in the medium term, is expected to keep interest rates unchanged at 6.5% at the conclusion of today’s policy meeting

International front:

The dollar seems to be losing a bit of momentum this morning after the double-whammy of dovish-looking minutes of the Federal Reserve's last policy meeting and the threat by U.S. President Donald Trump of imposing new tariffs on imported cars. The euro was hampered by concerns over an economic slowdown in the currency bloc and political risks in Italy, staying near a six-month low against the dollar and a nine-month nadir versus the yen. Measured against a basket of six major currencies, the dollar stepped back to 98.865 from its five-month high of 94.195 hit just before the release of the Fed's minutes.

While most policymakers thought it likely another interest rate increase would be warranted - in line with market expectations - the minutes showed the Fed would tolerate inflation rising above its goal for a time. "This means the effective interest rates in the future have shifted five basis points lower over a long period of time. In other words, we could even say the Fed today cut rates by five basis points," said Toru Yamamoto, chief fixed income strategist at Daiwa Securities. The dollar's fall accelerated as Trump appeared to have opened a new front in the trade war by considering new tariffs, this time on cars, just days after Washington agreed with China to put "on hold" its plan to impose tariffs on $150 billion worth Chinese goods.

The euro bounced back slightly to 1.1705 against the greenback, after have a really tough day yesterday hitting a six-month low of $1.1676. But the common currency was held back by economic and political worries in Europe. IHS Markit's Euro Zone Composite Flash Purchasing Managers' Index (PMI), considered a good guide to the euro zone's economic health, sank in May to an 18-month low, suggesting the continent's strong growth last year has lost steam. Investors were unnerved by political developments in Italy, where the coalition government proposed by the anti-establishment 5-Star and far-right League could tap Eurosceptic economist Paolo Savona as economy minister.

Our Range for  the Day  :       R12.4000   -   R12.6000