Daily Commentary - 29 November 2017

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

- USD / ZAR 13.5977 - EUR / ZAR 16.1404 - GBP / ZAR 18.2452 -

Economic Events:

29-Nov : EC Business Confidence - US GDP

30-Nov : SA PPI and Balance of Trade - US Initial Jobless Claims

01 Dec : SA New Vehicle Sales - EC Markit Manufacturing PMI - US ISM Manufacturing PMI

Market Commentary:

Rand bulls have remained in power following the 40 cent move on Monday.  The Rand breached the 13.6750 level yesterday and pushed down to a high of 13.57 against the Greenback.  The last time we were at these sort of levels was nearly 6 weeks ago which implies that the Rand is not only stronger since the downgrade by S&P, but stronger than where it was before the October Medium Term Budget Speech.  This, however, does imply the Rand gains have once again been overdone as the move is not being driven by foreign real money investors, with the numbers showing foreigners dumping another R2bn of bonds yesterday.  This should be taken as a strong warning sign as it’s very unusual to have such a huge rand rally that is not supported by strong inflows.  But on the flipside, it’s a good sign that the Rand’s carry trade has picked up once more as our carry return has risen from close to 2% to nearly 5.4% against the Greenback since Monday alone.  The Rands one-week implied volatility has plummeted from 25% to 16% since Monday too.

It’s expected that there will be little to stop the Rand bulls before the ANC elective conference that starts on the 16th of December.  Christopher Shiells, an analyst at Informa Global Markets commented, saying “For now, risks have been priced into the market and the outcome of the ANC conference is the key to what the rand and South African assets will do next year”.  The yield on SA benchmark government bonds due in December 2026 fell another 4 basis points to 9.16%.

One could argue that this could be stemming from an underlying optimism that a Ramaphosa win is on the cards, but this is far from a done deal.  Yesterday’s figures on branch endorsements from the Free State make this clear: Dlamini-Zuma reportedly got 209 votes against only 44 for Ramaphosa.  With all this political noise and uncertainty it was no surprise that SA BER Business Confidence came in at a measly print of 34 yesterday, up from 29 in Q2 but still at post 2008 financial crisis levels.  SARB also published its monetary aggregates and private sector credit extension data for October this morning.  Total private sector credit extension growth was largely unchanged in October, coming in at 5.4%, 10bps down from September, while corporate credit extension growth eased to 7.1% YoY, its weakest pace since December 2013.

North Korea has staged another missile test which could put the U.S. East Coast in Range which could dent Trumps Tax Reform Bill deadline.  However, this does not seem to have slowed the momentum of the current risk on environment for now.

Our Range for the day:  R13.5000 – R13.7000