Daily Commentary - 25 January 2018

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

- USD / ZAR 11.9267 - EUR / ZAR 14.8150 - GBP / ZAR 17.0234 -

Economic Events:

25 Jan : SA PPI -EC ECB Main Refinancing Rate - US Advance Goods Trade Balance ; Initial Jobless Claims ; New Home Sales

26 Jan : UK GDP - US GDP ; Durable Goods Orders

Market Commentary:

Yesterday the Rand broke below R12/$ for the first time since 2015.  The move was mainly due to the Greenback weakening as the Euro firmed.  The DXY Dollar index traded at its lowest point since December 2014 after consumer confidence in the Eurozone rose by 1.3 points which was well above market consensus.

Another driving factor that helped push the Rand lower was the positive reactions to the comments made by SA officials attending the World Economic Forum in Davos about ending corruption and improving the health of SA public finances.  Reserve Bank Governor Kganyago commented on the robustness of South African institutions and said the SA confidence has surged with “renewed optimism”.  In particular he cited parliaments return to its core purpose of holding the executive and public officials to account and said that “corruption and misrule will soon be history”.  This all bodes very well for the Rand as we have opened today at 11.89 against the Greenback, however, despite the current optimism, the still relatively weak macro fundamentals will likely reassert and we should see the Rand weaken, especially as we approach our yearly budget.  It’s also widely expected that Moody’s will downgrade SA after its rating review at the end of February unless the budget on 21 Feb is a masterful defeat of the huge fiscal slippage without further constraining weak growth.  SA December CPI data showed headline inflation at 4.7% y/y which was in line with forecasts but 0.1% higher than November and most likely spurred on by higher fuel prices.

In other news, Brent broke $70/bbl yesterday while EUR/USD spiked through 1.24.  Yesterday’s Dollar weakness was accelerated by the extraordinary comment from US Treasury Secretary Mnuchin that the US favours a weak dollar, a complete break from the position that the US has held since the early 1990’s.  The comment reinforces the mercantilist and protectionist mindset of the administration that was so evident in the washing machine story and is also being pushed by the US commerce secretary in Davos.  Restrictive trade talks from the Trump administration also contributed to the Greenback weakening.

We are also awaiting the ECB meeting this afternoon where there are rumours that Draghi may announce an earlier exit from QE which could cause a bit of a taper tantrum for emerging markets.

Our Range for the day:  R11.8000 – R12.0000