Daily Commentary - 26 March 2018

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

- USD / ZAR 11.6437 - EUR / ZAR 14.4109 - GBP / ZAR 16.5117 -

Economic Events:

26 March : US Dallas Fed Manufacturing Activity

27 March : EC Economic Confidence - US Consumer Confidence

28 March : US MBA Mortgage Applications ; GDP - SA SARB Interest Rate Announcement

29 March : SA Money Supply ; PPI ;Trade Balance - UK GDP - US Initial Jobless Claims; University of Michigan Sentiment

30 March :  No data of real importance

Market Commentary:

This morning the USD/ZAR opens 1.2% stronger at 11.6800, the low of 11.6800 was already seen on Friday after Moody’s maintained South African’s Baa3 local and foreign currency ratings on the back of more transparent and predictable policies under President Cyril Ramaphosa .  Moody’s identified three main drivers for leaving the rating unchanged: a halt and partial early reversal of the deterioration of South Africa’s institutional strengths; a pick-up in GDP growth prospects; and a credible fiscal plan represented by the 2018 Budget.  Perhaps surprisingly, Moody’s changed the outlook on the rating from Negative to Stable.  Moody’s said in its statement that this reflected an even balance of upside and downside risks, with the “new administration facing equally significant opportunities and challenges”.  The market’s attention will now likely shift to the other two agencies – Standard & Poor’s and Fitch – both of which are likely to announce in late May.  We think both rating agencies will leave their ratings unchanged, with a small chance that the political and growth progress since they last downgraded South Africa might encourage them to change their outlooks to Positive from Stable, provided momentum is maintained over the next three months. (Source: Absa).

It is expected by a number of participants that the South African Reserve Bank is to ease policy rates by 25bp to 6.50% on Wednesday.  This would mark resumption in the SARB’s easing cycle since it last cut rates in July 2017.

As outlined previously, a number of factors are likely to allow the SARB to look through the short-term headache of a 1pp rise in the VAT rate (adding an estimated 0.6pp to headline CPI inflation from April):

  • Headline inflation is currently well below the mid-point of the bank’s 3-6% inflation target range.
  • The currency has appreciated by more than 10% against the USD since before the ANC elective conference in December.
  • Political risk premia are lower and external vulnerabilities have improved.
  • Moody’s is likely to have delivered some credit ratings reprieve by the time the committee sits this week.


Furthermore, it is expected that SARB is to revise down its longer-term inflation projections on the basis of a stronger currency assumption.  This is likely to bring its end-2019 CPI forecast closer to 5.0%, compared with the 5.5% it estimated in January.

A couple of factors are likely to keep the monetary policy committee cautious, however, a likely closing of South Africa’s negative output gap in 2018 (estimate GDP growth of 2.0% in 2018 versus the SARB’s current potential growth assumption of 1.3%), and some uncertainty related to the exact impact of a 1pp increase in VAT on first- and second-round inflation.

On Thursday we will see the release of February’s private-sector credit, producer prices and trade balance figures. We expect a small moderation in headline PSCE growth, while PPI inflation is likely to have slowed to 5.0% from 5.1% on lower fuel prices and a stronger currency since December.  The trade deficit is expected to have narrowed sharply in February after the shortfall spiked to ZAR 27.7bn in January, largely on ‘one off’ equipment imports. ( Source : BNP )

On the international front , Global equities closed Friday trade lower on lingering trade war fears, and the negative impact it could have on global growth.  The Dow, Nasdaq and S&P declined by 1.8%, 2.4% and 2.1% respectively.  Asian shares, the Nikkei and China Shanghai declined by 0.5% and 1.6% respectively.  US equities were further weighed down by technology stocks amid concerns of data breaches, which heightened fears of tighter regulation of the sector.  Global focus this week will be on trade tariff development. ( Source : RMB)

Our range for the day : R 11.5500 – R 11.8000