DAILY MARKET UPDATE - 06 SEPTEMBER 2019 | Merchant West

DAILY MARKET UPDATE - 06 SEPTEMBER 2019

treasury outsourcing

Merchant West Capital Markets

USD/ZAR 14.7525 | EUR/ZAR 16.2656 | GBP/ZAR 18.0566

Please feel free to contact us on the details below:

JHB: (011) 305-9500 | PTA (012) 742-8600 | CPT (021) 552-7007 

email: treasury@merchantwest.co.za

Market Data:

02 Sep - GE: Markit/BME Germany Manufacturing PMI | UK: Markit PMI Manufacturing SA | SA: ABSA Manufacturing PMI | SA: NAAMSA Vehicle Sales (y/y)

03 Sep - EC: PPI (y/y) | SA: GDP Annualized (q/q) | US: Markit US Manufacturing PMI | US: ISM Manufacturing

04 Sep-  SA: Standard Bank South Africa PMI | EC: Markit Eurozone Services PMI | Retail Sales (y/y) | US: Trade Balance | Fed's Williams Speaks in New York

05 Sep - SA: Current Account as % of GDP | Current Account Balance | US: Nonfarm Productivity | Initial Jobless Claims | Continuing Claims | Markit US Services PMI

06 Sep - SA: Gross Reserves | Net Reserves | EC: GDP SA (y/y) | US: Change in Nonfarm Payrolls | Change in Private Payrolls

Market Commentary:

Current account data was not quite as supportive of rand fundamentals as the market had been expecting, with a 4%/GDP deficit generated in the second quarter (R204.1bn deficit, or about 25% higher than consensus). The surprise seems to have been primarily driven by higher-than-expected growth in imports amid soft export growth, due to volatile and in some cases sluggish commodity prices. This seems to have primarily been a function of buoyant oil prices, one of South Africa’s biggest net imports, while the broader commodity basket has been languishing amid lower Chinese demand.

Richard’s Bay coal prices, for example, sit almost 40% lower y/y while oil prices are about 20% lower over the same time frame. This kind of price squeeze puts deep structural pressure on the trade account, and it should be said that in the absence of a conservative central bank stance we could well have seen a deficit north of 5% being generated, as was the case in 2013-2015. The wider-than-expected deficit gave rand bulls a tap on the wrist, with spot USD-ZAR bouncing off of intraday lows to end the session about 1% higher than those lows. There was also some stronger US data to help the dollar regain its footing more generally. While the US manufacturing sector looks set to slow down sharply, the non-manufacturing PMI came in much stronger than expected with ADP employment data also surprised to the upside giving hope for that this week's official employment data will impress.

In terms of international data, note that today US non-farm payrolls data will be released, as the likely driver of market allocations into the weekend. With ADP surprising to the upside, some may be positioning for the potential for an upside surprise in the payrolls release for August. Keep an eye on wages data as well, with weakness in this respect holding the potential to drive the point home that inflation pressures are likely to abate in coming months.

ZAR View: The rand is set to end the week sharply stronger in any case, with a close around R14.80/dollar looking likely, marking a week-to-date gain of 2.2%. Support sits in the 14.75 region, and tests here will be closely watched in the event that Payrolls surprises to the downside. A break below would bring Fibo retrace levels towards 14.65 back into view. The ZAR has recovered considerably this week and the desire to unwinding long USD positions will have moderated. The clear-out has now materialised and the market will likely reset around this new base and look for a fresh catalyst to drive the next leg. That may wait until next week with investors reluctant to hold positions into the weekend.

Range for the day: 14.75 - 15.00