Daily Commentary - 29 November 2018

Market Data:

29 Nov - SA PPI Date | EC Consumer Confidence | US Initial Jobless Claims and FOMC Meeting Minutes

30 Nov - CH Manufacturing PMI | EC CPI Data | SA Trade Balance

Market Commentary:

SARB Note - South Africa's rand will remain volatile in 2019, making monetary policy complicated and focused on long-term inflation factors rather than short-term market shocks, central bank Deputy Governor Daniel Mminele said on Wednesday. Mminele said the bank expected the rand to average 14.50 against the dollar but trade would be volatile, forcing the monetary policy committee to remain flexible in its responses. “We will continue to allow the exchange rate to absorb the initial shocks, and focus our policy actions on addressing second-round price effects," Mminele said at a foreign exchange conference after the bank raised lending rates last week. “It is important that policy decisions should not be informed by short-run market developments in either direction."

 

The rand has slumped more than 20 percent against the dollar in 2018 since a sharp selloff of emerging market assets in April triggered by rising U.S. rates and worries about a trade dispute between the United States and China. The South African Reserve Bank raised lending rates for the first time in nearly three years last Thursday, by 25 basis points to 6.75 percent, saying it could not risk waiting for risks to inflation to materialise before acting. The bank targets inflation of between 3 and 6 percent, but has emphasised that it is more comfortable with consumer price growth closer to 4.5 percent, the mid-point of the range. Inflation came in at 5.1 percent in October.

 

International currency front - The dollar extended its overnight losses on Thursday after Federal Reserve Chairman Jerome Powell said U.S. interest rates were just below neutral, taken by investors as a tip that the rate hike cycle was nearing its end. Powell's dovish remarks took the currency markets by surprise as he noted that the policy rate, at 2-2.25 percent, is now "just below" the broad range of estimates of neutral, which in September was 2.5-3.5 percent. This view represents a significant departure from comments in October when he said rates were a "long way from neutral at this point".

 

The Fed chairman's remarks led to the dollar weakening across the board, especially versus riskier currencies such as the Australian and New Zealand dollars, which both gained 1.2 percent in the previous session. Some emerging market currencies such as the South African rand and the Turkish lira also gained 1 percent each. “Powell’s comments were read as too hawkish back in October...to some extent his overnight comments have neutralised that," said Rodrigo Catril, senior currency strategist at NAB. “The question now is just how much more dovish markets can get in terms of rate hike expectations. ..investors are now pricing in a December rate hike and only one more rate hike in 2019," added Catril.

 

"U.S. economic data has been weakening, stocks have been falling and lower oil and gas prices restrict rather than encourage inflation. As a result, consistent rate hikes are no longer necessary," Kathy Lien, managing director of FX strategy at BK Asset Management, said in a note. “In many ways Powell is stating the obvious by saying what the market is starting to feel already," she added. Traders may be cautious of building aggressive short positions, given the G20 summit on Friday and Saturday where U.S. President Donald Trump and China's President Xi Jinping are scheduled to discuss contentious trade matters.

 

International data front - The U.S. economy slowed in the third quarter as previously reported, but the pace was likely strong enough to keep growth on track to hit the Trump administration's 3 percent target this year, even as momentum appears to have moderated further early in the fourth quarter. Gross domestic product increased at a 3.5 percent annualized rate, the Commerce Department said on Wednesday in its second estimate of third-quarter GDP growth. That was unchanged from its estimate in October and well above the economy's growth potential, which economists estimate to be about 2 percent.

 

The economy grew at a 4.2 percent pace in the second quarter. While businesses accumulated inventory at a faster pace and spent more on equipment than initially thought in the third quarter, that was offset by downward revisions to consumer spending and exports. Growth is being driven by the White House's $1.5 trillion tax cut package, which has given consumer spending a jolt and supported business investment. The fiscal stimulus is part of measures adopted by President Donald Trump's administration to boost annual growth to 3 percent on a sustainable basis.

 

Our Range for today: R13.6000 - R13.9000