Daily Commentary - 28 May 2018 | Merchant West

Daily Commentary - 28 May 2018

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

USD / ZAR 12.4409 - EUR / ZAR 14.5492 - GBP / ZAR 16.5708 -

Economic Events:

28 May : No data of real importance

29 May : US Conf. Board Consumer Confidence

30 May : SA Money Supply ; Budget - EC Consumer Confidence - US MBA Mortgage Applications ; GDP data

31 May : CH Manufacturing PMI - SA PPI Data ; Trade Balance - EC CPI Estimate - US Initial Jobless Claims

1 June : EC Eurozone Manufacturing PMI - SA Manufacturing PMI - US Change in Nonfarm Payrolls ;ISM Manufacturing

Market Commentary:

We start the final week of May still feeling rather shell shocked in terms of what this month had to offer. Certainly the most topsy turvy month of the year thus far with volatility at a crazy high, seeing massive swings in both directions which so often only last a day or two before being 50c in the other direction. Speculation driven by greed and fair amount of uncertainty was the order of the day – every day and it’s hard to know when normality will find its’ way back into the EM Markets.

Last week ended with the Dollar again pushing hard against most currencies, with the Euro specifically coming under some proper strain. The EUR/USD at closed of trade in N.Y. on Friday night was as low as 1.1650, with it being at 1.1820 only a few days before (Tuesday 22nd May). 1.18 is in itself already a very weak level when you consider that by mid-April (i.e. the 17th) we had the EUR/USD at 1.2410, and although this aggressive push by the currency markets back into the Dollar does make sense, we are all questioning how long will it last, and many are looking to EM Market currencies (like the Rand) to hopefully give us an indication of that, but for now the indicators are still very mixed and we certainly don’t seem to be out of the woods just yet.

The rand on Friday performed remarkable well if you consider how strong the dollars’ performance was. We opened in the early hours of Asian trade around USD/ZAR 14.4200. Weakened as the day went along to at worst 14.5400, before pulling back nicely to close around the 14.50 mark and have certainly started our day in the right direction as we move again into the lower 14.40’s.

On Friday evening we saw S&P Ratings announced their review on S.A. and there were no real surprises, with S&P sticking to its previous assessments and reaffirming what they have always maintained about the economy. SA's rating remained in junk at "BB/B" on the long- and short-term foreign currency sovereign credit ratings whilst keeping its 'BB+/B' long- and short-term local currency sovereign credit ratings on South Africa. The outlook remained stable.

One of the most prominent comments was that, "Our ratings on South Africa are constrained by the weak pace of economic growth, particularly on a per capita basis, as well as its large fiscal debt burden and sizable contingent liabilities." This remains the crux of SA's problems. It's not monetary, it's not land reform, it's fiscal. SA does not have control of its’ fiscus and has not yet adequately dealt with its contingent liabilities, especially its airlines as witnessed by the grounding of SA Express this past weekend. Worst of all, there is no coherent and articulated economic reform that is set to generate the kind of growth that will help bolster tax revenues and shore up the country's fiscal position. S&P specifically made note of, "Despite upward revisions, South Africa's economic growth remains tentative, and the government's debt burden continues on a rising path." Whilst acknowledging some of the progress that has been made under the Ramaphosa government and whilst giving this government the benefit of the doubt, quite clearly the Ratings agency would like to see some proof that the country's fiscal trajectory has stabilised and that debt levels are no longer rising. (ETM).

We have a big week ahead in terms of domestic data, but still feel that speculation will be the driving factor again, with possible opportunities to both importers and exporters coming our way.

Our Range for the Day:  R 12.3500   -  R 12.6000