DAILY MARKET UPDATE - 12 JUNE 2019

markets commentary

Merchant West Capital Markets

USD/ZAR 14.7324 | EUR/ZAR 16.6850 | GBP/ZAR 18.6803

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Market Data:

12 June - EU: ECB President Draghi Speaks in Frankfurt | SA: Retail Sales Constant (y/y) | Retail Sales (m/m) | US: CPI (y/y) | Monthly Budget Statement

13 June - SA: Mining Production y/y & m/m | Gold Production y/y | Platinum Production | BER Business Confidence

14 June - US: Retail Sales Advance | Industrial Production | Manufacturing (SIC) Production  

Market Commentary:

* South Africa's rand rallied more than 1% on Tuesday, stretching its rally back from a nine-month low as cooling trade war worries and much larger-than-expected growth in local manufacturing boosted the battered currency and equities. At 17h15 the rand was 0.88% firmer at 14.7000 per dollar, a touch off its session-best of 14.6550 reached just as New York trading got underway, with sentiment on the side of emerging currencies following the tariff deal between Washington and Mexico. Last week the rand sank to its weakest since September after data showing growth contracted in the first quarter was almost immediately followed by a bitter public spat among senior ruling African National Congress officials over the Reserve Bank's mandate.

The dollar hovered near an 11-week low against its peers on Wednesday, weighed by expectations the U.S. Federal Reserve could cut interest rates sometime in the next few months. The dollar index versus a basket of six major currencies was effectively flat at 96.707, trading just above the 96.459 level it hit on Monday, its lowest since late March. The index has been under pressure following a sharp decline in long-term U.S. Treasury yields, which fell to near two-year lows on Friday after a soft U.S. jobs report raised expectations for an interest rate cut by the Fed. Investor focus is now on the Fed's next policy meeting on June 18-19 and what kind of signals the central bank could offer on the direction of monetary policy. “The market has priced in a rate cut by the Fed to a significant degree," said Shinichiro Kadota, senior strategist at Barclays in Tokyo. “So the market is waiting for next week's Fed meeting as a chance to see by how much and for how long it is ready to ease policy."

SARB - A row within South Africa's African National Congress (ANC) about the role of the central bank has unnerved investors and exposed deep divisions in the governing party. One ANC faction loyal to President Cyril Ramaphosa is opposing calls from a rival group for the central bank's monetary policy to do more to boost employment and growth. The dispute threatens to undermine confidence in Africa's most advanced economy, as the South African Reserve Bank (SARB) has a strong reputation for acting independently. Here are responses to some of the questions raised by the row over the central bank's role.

WHY ARE INVESTORS WORRIED?

In South Africa, investors are worried by the row over the SARB's mandate because it is being driven by bitter factional battles within the ANC rather than sober policy debate. They are concerned that expanding the central bank's mandate could increase arguments for riskier monetary policy. The push to change the bank's role comes from a left-wing camp within the ANC that wants Ramaphosa to change tack on a range of policies and is using the mandate issue as a battering ram, some ANC members say. The economic implications for South Africa could be serious if the change is rammed through in a way that shakes the confidence of the investors who fund the country's twin budget and current account deficits. It could also impact the country's sovereign credit ratings. Only one global ratings agency, Moody's, still gives South Africa an investment-grade rating, but that rating is hanging by a thread and if it falls the government's borrowing costs would almost certainly rise. Moody’s has said the central bank's credibility is an important factor in its ratings decisions.

HOW COULD THE SARB'S MANDATE BE CHANGED?

Altering the SARB's mandate could be a drawn-out process, as officials understand the process differently. Some believe the constitution would have to be amended since the SARB's current focus is enshrined in that document. A two-thirds majority in the lower house of parliament is required to change the constitution. The ANC has 230 out of the 400 seats in the lower house, or 57.5 percent of the seats, so it would have to rely on the support of other parties.But other officials believe a letter from the finance minister, like the one written by Gordhan in 2010, would be sufficient to change the mandate. Current Finance Minister Tito Mboweni is an opponent of changing the SARB's mandate. If the SARB thinks its independence is under threat, it could challenge in court any moves to change its mandate.

Local data front -  South Africa's manufacturing output hit its highest in two years, rising 4.6% year-on-year in April after increasing by a revised 1.3% in March, the statistics agency said on Tuesday. Economists polled by Reuters had forecast a 1.35% year-on-year expansion in April. On a month-on-month basis factory production rose by 2.8% in April, Statistics South Africa.

* Information Sourced From Retuers.com

Range for the day: 14.60 - 14.85