Daily Commentary - 31 January 2018

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

- USD / ZAR 11.9282 - EUR / ZAR 14.8343 - GBP / ZAR 16.9240 -

Economic Events:

31 Jan : EC CPI - SA Trade Balance  - US ADP Employment Change ; FOMC Rate Decision

01 Feb : US ISM Manufacturing

02 Feb : EC PPI - US Change in Nonfarm Payrolls ; Unemployment Rate

Market Commentary:

Since late last year, the rand has almost exponentially been gaining momentum as it moved to become one of the world`s best performing emerging market currencies. The recent strength has however raised the question whether the current rally is sustainable in the longer term. The rand saw a slight retracement yesterday as market participants braced for the release of Eskom`s interim financial results, a favourite of the ratings agencies. The embattled power utility has become representative of the state of South Africa`s state owned enterprises, and weak financial performance could have negative spill over effects for the local economy as a whole. Following the release of the results, “the newly-appointed Eskom board chairman Jabu Mabuza and interim CEO Phakamani Hadebe were full of confidence on Tuesday that the utility will find the R10 billion Eskom needs to pay its creditors by February 1” (source: Moneyweb).The import side of the market is now benefitting from the current currency movements, a benefit that has almost exclusively been reserved for the export side over the past four years. The rand strength has also been responsible for the sell-off off rand hedge shares, and a drop in local fuel prices. The rand is expected to continue strengthening, at least in the short term, but caution should be exercised due to the sensitivity of the rand to political headlines.

In the US market, conflicting views for the dollar has become a source of confusion for market participants. The first came from Steve Mnuchin, Secretary of the US Treasury, who expressed little concern over the weak US dollar and highlighting the benefits of a stronger dollar shortly after. “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin said.  According to the South China Morning Post, Mnuchin may have added to the greenback’s existing woes by casting doubt over the Treasury’s long-standing adherence to a strong dollar policy. The second originated from President Donald Trump, who reiterated the importance of a stronger dollar. The dollar index, which tracks the greenback against a basket of six major currencies, traded down 0.1% to a level marginally above the three-year low. The focus of market participants will now move towards the US Federal Reserve meeting scheduled for today. While three interest rate hikes are expected for the coming year, the first is only expected in March, which could extend the current dollar weakness. Market participants will also pay close attention to the US jobs report and nonfarm payrolls due to be released on Friday.

In the UK market, the pound continues to strengthen on strong economic data the probability that the UK will secure favourable Brexit terms. Mark Carney, Governor of the Bank of England stated that the bank will focus on managing inflation, which signalled that the stimulus program could be tapered sooner than expected. The Bank of England has also indicated that it is unlikely to hike interest rates until wage pressures grow.

In other news, “South Africa’s best-performing stock of the last decade, Capitec Bank Holdings, was rattled after a short seller alleged the lender was concealing significant write-offs. The bank denied the allegations and fired back by reporting Viceroy Research to regulators” (source: Moneyweb). Also, “Christo Wiese has confirmed his attendance at the Parliamentary inquiries into the allegations of fraud and corruption at Steinhoff which begins today in Cape Town” (source: Moneyweb).

Our range for the day : R11.8500 R 12.0500