Daily Commentary - 27 October 2017

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

- USD / ZAR 14.2585 - EUR / ZAR 16.5699 - GBP / ZAR 18.6879 -

Economic Events:

27-Oct : US GDP ; Univ. Michigan Sentiment

Market Commentary:

On Thursday, the local currency entered a second day of heavy losses as a stronger US dollar and the aftermath of Finance Minister Malusi Gigaba`s medium-term budget speech weighed on the rand. The initial rand sell-off was set in motion on Wednesday when Finance Minister Malusi Gigaba took to stage and painted a bleak picture of South Africa`s finances under the watchful eyes of investors and ratings agencies. The rank weakened to an intra-day low of R14.29 against the US dollar, but regained minor traction as the market closed. Ratings agencies reduced their optimism about South Africa`s future on the back of the dim economic outlook, with Fitch expressing their concerns over the lack of feasible plans to address ballooning debt levels and the increasing budget deficit. “It’s likely you’re seeing some profit-taking at the moment but we see a big chance of the rand going further down in the next few sessions mainly on the fears of further downgrades,” said emerging market analyst at Continuum Economics Juri Ken. On the data front, Statistics South Africa on Thursday released Producer Price Index (PPI) data which showed an increase in both its main indicators. Year-on-year PPI data figures increased to 5.2% from a prior recording of 4.2%, while month-on-month numbers increased to 0.7% from a previous recording of 0.4%. On the JSE, resource stocks which earn their revenue in dollars and pay their costs in rand, lifted the bourse due to the weaker rand. The Top 40 Index traded up 0.8% and the All Share Index up 0.78%. (Source: Moneyweb)

In the US, the dollar index which tracks the greenback against a basket of six major currencies, traded up by 0.5% on Thursday. The US dollar is enjoying a remarkable surge after limping for the better part of this year. Markets are waiting for clues on who will be the next Chair of the US Federal Reserve, and whether the Federal Reserve will be governed from a hawkish or dovish stance. Currently, expectations point towards the hawkish Stanford University economist John Taylor as Janet Yellen`s replacement, who will possibly accelerate the interest rate hiking cycle in the US economy. Investors are also assessing the likelihood that President Donald Trump`s tax reform proposal will be implemented. This has created a lot of uncertainty in the US fiscus which forces the market to act cautiously. However, President Donald Trump remains a wild card and once the market receives some clarity, the dollar could see further gains.

The following is an excerpt from a Reuters article: “The euro slumped to three-month lows after the European Central Bank extended its bond purchases and reduced the chances that it would hike interest rates in 2018. The ECB prolonged its bond buying programme by nine months to September 2018, and left the door open to keep buying after that. It said it would begin paring its monthly purchases by half to 30 billion euros ($34.90 billion) starting in January. ECB chief Mario Draghi said “an ample degree of monetary stimulus remains necessary”, as inflation has yet to show signs of a sustained upward trend. The euro was down 0.15 percent at $1.1633 after touching $1.1624, its lowest level since July 26. It was down 1.3 percent for the week. The common currency slumped against the greenback as the ECB’s cautious approach highlighted the difference between the Federal Reserve, which is poised to raise rates in December as it continues to normalise monetary policy.”

Our Range for the day - R14.1500 - R14.5000