Daily Commentary- 30 October 2017

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

- USD / ZAR 14.1001 - EUR / ZAR 16.3613 - GBP / ZAR 18.5164 -

Economic Events:

30-Oct: US Personal Income ; Personal Spending

31-Oct: EC  GDP SA (q/q ) ; CPI Estimate (y/y) - SA Trade Balance

01-Nov: SA Barclays Manufacturing PMI ; US ISM Manufacturing ; FOMC Rate Decision

02-Nov : SA Standard Bank SA PMI - EC Markit EZ Manufacturing PMI - US Initial Jobless Claims

03-Nov : US Change in Nonfarm Payrolls; Trade Balance ; ISM Non-Manf. Composite

Market Commentary:

On the Domestic front:

South Africa's rand recovered on Friday after two days of heavy losses sparked by a bleak budget, benefiting from an uptick in other emerging market currencies and helped by local exporters selling dollars. At 17h20 the rand was 0.7% stronger at 14.1400 per dollar, paring the week's losses to around 3.4% after falling on each of the past four days. South African assets have been pummelled this week by speculation that the country faces further credit rating downgrades as a result of the dismal state of its public finances.

A currency trader at Rand Merchant Bank (RMB) said the rand was helped on Friday by large South African firms selling dollars as they closed their books for the month. A report that President Donald Trump is leaning toward Jerome Powell as his pick to head the U.S. central bank also tamed dollar strength on global markets and gave a boost to emerging market currencies. "Still, the rand is in the middle of nowhere," the RMB currency trader said. "It's far from certain where the currency will trade next week." S&P Global and Moody's are scheduled to review South Africa's credit ratings next month, and all eyes are on whether they lower the country's local-currency rating. A one-notch downgrade by both agencies would lead to ejection of South Africa's rand-denominated bonds from widely tracked global indices, heaping more pressure on the currency.

South Africa will unveil a stimulus package focusing on tourism and manufacturing to turn around the economy, Finance Minister Malusi Gigaba said on Friday, following a budget speech last week that raised the risk of credit downgrades. In a speech to investors, Gigaba said Treasury would not wait for the ruling African National Congress's leadership conference in December to take the "drastic decisions" needed to grow the economy and maintain fiscal consolidation. Political uncertainty has persisted ahead of the ANC conference where the party will elect a new leader to succeed President Jacob Zuma, who is battling several scandals, including corruption allegations. Zuma denies the accusations. "We cannot be hamstrung by what is going to happen in December. We have an obligation to ensure the economy continues functioning," Gigaba said, adding that concrete steps to grow revenue would be announced in the February budget. In his budget speech last week Wednesday, Gigaba said the country's fiscal deficit for this year was forecast to widen to 4.3% of gross domestic product due to a more than 50 billion rand ($3.5 billion) revenue shortfall.

On the International front:

The dollar edged away from last week's three-month highs this morning, while the euro nursed losses after the European Central Bank and unrest in Spain's Catalonia led it to post its worst week this year. The dollar index, which tracks the greenback against a basket of six major rivals, dipped 0.2% to 94.775 but remained not far from Friday's three-month high of 95.150. The euro inched 0.1% higher to $1.1614, after plumbing a three-month low of $1.1574 on Friday, and losing 1.6% for the week, its worst performance in 11 months. On Saturday, sacked Catalonian president Carles Puigdemont called for peaceful "democratic opposition" to the central government's takeover of the region following its unilateral declaration of independence from Spain.

Back on Thursday, the ECB said it will extend its bond purchases into September 2018 while reducing its monthly purchases by half to 30 billion euros starting in January. The move led investors to bet that the central bank would not begin hiking rates until 2019. "The ECB wanted to keep its accommodative policy longer, to achieve its inflation goal," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities. "So the latest downward movement in the euro was expected, and I think it will continue for a while," he said. "Until the Catalonian situation settles, it will remain a headwind." In contrast with the ECB, the U.S. Federal Reserve is expected to resume raising interest rates, perhaps as early as December. "The market has already pretty much priced in a December move, so the real key question is how much the markets price in for next year, and that could drive the dollar even higher in the short term if we see more being priced in," said Mitul Kotecha, from Barclays in Singapore.

International data front:

U.S. economy unexpectedly maintained a brisk pace of growth in the third quarter as an increase in inventory investment and a smaller trade deficit offset a hurricane-related slowdown in consumer spending and a decline in construction. Gross domestic product increased at a 3.0% annual rate in the July-September period, also supported by strong business spending on equipment, the Commerce Department said on Friday. With inventories, goods yet to be sold, contributing almost three-quarters of a percentage point to growth last quarter, the increase in GDP overstates the economy's health. Excluding inventory investment, the economy grew at a 2.3% rate, slowing from the second quarter's 2.9% pace. A measure of domestic demand also decelerated to a 2.2% growth rate from the April-June period's 3.3% pace.

"This is a positive report for an economy that was battered by two hurricanes late in the quarter but it is not as strong as the headline 3.0% growth might suggest," said John Ryding, chief economist at RDQ Economics in N.Y.. The economy grew at a 3.1% in the second quarter and it was the first time since 2014 that it experienced growth of 3% or more for two quarters in a row. Economists had forecast GDP increasing at a 2.5% rate in the third quarter. The government said while it was impossible to estimate the overall impact of hurricanes Harvey and Irma on third-quarter GDP, preliminary estimates showed that the back-to-back storms had caused losses of $121.0 billion in privately owned fixed assets and $10.4 billion in government-owned fixed assets.

"Fed officials will be encouraged by both the overall performance and the composition of growth in the third quarter, which confirms the U.S. economic expansion remains on solid ground," said Michelle Girard, chief U.S. economist at NatWest Markets in Stamford, Connecticut. The dollar rose to a three-month high against a basket of currencies on the data. Prices for U.S. Treasuries fell, with the yield on the interest rate sensitive two-year note touching a fresh nine-year high. U.S. stocks were trading mostly higher.

Our range for the day : R14.05 - R14.20