Daily Commentary - 25 May 2018

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

USD / ZAR 12.4665 - EUR / ZAR 14.5840 - GBP / ZAR 16.6483 -

Economic Events:

25 May : UK GDP - US Durable Goods Orders ;University of Michigan Sentiment

Market Commentary:

South Africa's rand was slightly stronger yesterday as a recent rally in the dollar lost steam and the Reserve Bank left its main lending rate unchanged. At 17h50, the rand was trading at 12.4475 against the dollar, around 0.1% stronger than its close on Wednesday. The rand's gains mean it is now up almost 3% since the end of last week, an especially strong performance given that emerging market currencies have been feeling the heat recently on global markets. The governor argued – rightly in our view – that risks lie to the upside," Capital Economics analyst John Ashbourne said in a research note. "While the rand managed to dodge the dramatic falls seen elsewhere in the emerging market world this month, the currency still poses a key risk."

Domestic front:

South Africa's central bank kept its benchmark repo rate on hold as expected yesterday following a rate cut at the previous meeting, as it balances risks to consumer price inflation and a fragile economic growth recovery. Africa’s most industrialized economy has barely grown in the past decade with fiscal missteps and government corruption contributing to weak business and consumer confidence. The South African Reserve Bank said the growth outlook remained challenging but was expected to outperform recent outcomes underpinned by better business and consumer confidence. Investor sentiment has picked up since President Cyril Ramaphosa took the helm in February after the resignation of scandal-plagued Jacob Zuma.

The bank's Monetary Policy Committee (MPC) unanimously decided to keep the repo rate at 6.5% and said it expects the economy to expand 1.7% this year, after growing by 1.3% in 2017. "The MPC still assesses the stance of monetary policy to be accommodative and appropriate given the forecast inflation trajectory and the current state of the economy," Governor Lesetja Kganyago told a news conference. “However, with risks and uncertainties at high levels, the MPC will maintain its vigilance to ensure that inflation remains well within the inflation target range, and will adjust the policy stance should the need arise".

The bank sees consumer inflation peaking at 5.3% in the third quarter, but would average 4.9% for the year. While the rate of increase in consumer prices is not expected to breach the top-end of the bank's 3-6% target during the forecast horizon, it said risks to the inflation outlook have tilted to the upside. Rising oil prices and possible higher electricity tariffs posed risks to the inflation outlook, Kganyago said.

In February the National Treasury announced a VAT increase for the first time in two decades, which could hurt consumer demand, to cap ballooning debt and close a large revenue shortfall. Kganyago said there was a degree of uncertainty regarding the likely impact of the VAT hike and sugar tax on food, and the extent to which these would be absorbed by manufacturers and retailers. South Africa's headline CPI quickened to 4.5% y-o-y in April after the VAT increase. "The SARB makes no secret of the fact that it would like to see inflation expectations converge around 4.5 percent, and the best way to achieve this is actually to bring inflation down to similar levels, on a sustained basis," Standard Chartered Bank's Chief Africa Economist Razia Khan said.

International data front:

New applications for U.S. unemployment benefits increased more than expected last week, but remained below a level consistent with a healthy labor market. Initial claims for state unemployment benefits rose 11,000 to a seasonally adjusted 234,000 for the week ended 19th May, the Labor Department said yesterday. Claims data for the prior week was revised to show 1,000 more applications received than previously reported. Economists polled by Reuters had forecast claims slipping to 220,000 in the latest week. Claims have held below the 300,000 mark, which is associated with a strong jobs market, for 168 consecutive weeks, the longest such stretch since 1969. The labor market is viewed as being close to or at full employment, with the jobless rate near a 17½year low of 3.9%. The unemployment rate is within striking distance of the Federal Reserve's forecast of 3.8% by the end of this year. Tightening labor market conditions and rising inflation will likely keep the U.S. central bank on track to increase interest rates next month.

Our Range for the Day  :     12.4000    -    12.5300