daily markets commentary

Merchant West Capital Markets

USD/ZAR 14.7750 | EUR/ZAR 16.3073 | GBP/ZAR 18.2211

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Market Data:

09 Sep - UK: BOE Vlieghe Speaks in London | Monthly GDP (m/m) | Trade Balance 

10 Sep - CH: CPI & PPI (y/y) | UK: Jobless Claims Change | SA: Manufacturing Prod NSA (y/y) | Manufacturing Prod SA (m/m)

11 Sep - SA: SACCI Business Confidence | BE Business Confidence | US: PPI Final Demand (m/m)

12 Sep - EC: Industrial Production SA (m/m) | Deposit Facility Rate | SA: Mining Production (y/y) & (m/m) | US: CPI (y/y) | US Monthly Budget Statement

13 Sep - EC: Trade Balance SA | US: Import Index (y/y) | Reatils Sales Advance (m/m) | Uni of  Michigan Sentiment 

Market Commentary:

Significant news overnight has been the soft inflation reading in China, with key PPI readings heading lower in the August print, primarily due to soft commodity prices and weakening global demand. While the headline CPI index was kept afloat by high food price growth, the non-food price basket has been disinflationary for some now decelerating to 1.1% y/y from 2.5% a year ago. This also stands as a sign of weakening underlying demand dynamics in the Asian powerhouse. For some sectoral context, this comes despite industrial profits holding up and the PMI coming in above expectations, yet factory gate prices are clearly under pressure. This would feed into the thesis that Chinese stimulus applied in recent months has not yet meaningfully filtered into the real economy. The outlook for the productive sector is also darkened by trade uncertainties and the contingent slowdown in growth and trade activity in other key parts of the world.

Soft Chinese inflation not only raises the spectre of a looser monetary policy stance, it also strengthens the thesis that we see the other major central banks loosening policy as the effects of lower commodity prices are likely to spill-over into their economies. The Eurozone, faced with the problem of uneven growth and high government debt levels, is especially sensitive to deflationary pressures, as they raise the real value of government debt at a time when investors are waiting for the outcome of Brexit. This then supports the likelihood that we see the ECB talking up scope for easing on Thursday, while there is already talk in some circles of a fresh effort at fiscal stimulus in Germany.

ZAR View: The manufacturing sector comes into focus today. While Eskom managed to keep the lights on in July, the broader structural bias in the sector points to weaker growth to detract from sentiment. However, The USD-ZAR has managed to test the 50-session moving average for the first time since August, while the trade-weighted, inflation-adjusted undervaluation has fallen from 11% to around 7% to point to a rand that may need more sustained dollar weakness to strengthen further. Technical support is evident in the 14.65/68 region with a break below targeting levels towards the 14.50 region. Although there may be some that may seek to build USD long positions, the bearish bias in the USD will give them cause to rethink this strategy. Any further improvement in risk appetite may trigger another bout of USD selling on any rally back up towards the 14.85-9000 range.

Range for the day: 14.65 - 14.95