DAILY MARKET UPDATE - 5 JUNE 2019
Merchant West Capital Markets
USD/ZAR 14.7841 | EUR/ZAR 16.6578 | GBP/ZAR 18.7816
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5 JUNE - SA - SACCI Business Confidence | EU - Retail sales
6 JUNE - SA - Current Account Balance | Electricity Production & Consumption | EU - Main refinancing rate | US - Trade Balance | Initial Jobless Claims
7 JUNE - SA - Gross Reserves & Net Reserves | US - Change in Nonfarm Payrolls | Unemployment rate
SA GDP numbers were a shocker yesterday, catching the market off guard, as we went from 14.40 to 14.65 in a flash. Eskom and power cuts had a big impact on the GDP numbers. Later in the afternoon we had ANC Magashule wanting to look at doing quantitative easing in to South Africa, putting more pressure on ZAR upto 14.77. Then last night we had Finance minister Tito, saying we will not be changing the SARB mandate of the bank or looking at any form of quantitative easing. So it’s all back to politics at the moment, but where is Cyril to stand up and make clarity on these issues? Markets feeling worried about these headlines and poor GDP numbers. We have shaved a further 0.5pp off this year’s GDP forecast and now see growth of just 0.4% in 2019 and 1.5% in 2020. Furthermore, the fact that SA’s GDP deflator remained at near record lows in Q1 (3.8% y/y - tracking around 0.8pp below headline CPI) further supports our out of consensus call for inflation to continue to surprise to the downside. As such, we think today’s GDP figures further reinforce our early call for the SARB to cut rates by 25bp on 18 July.
The US dollar retreated in yesterday’s session amid remarks Fed Chairman Jerome Powell articulating increased likelihood of monetary policy easing by the US Federal Reserves. The dollar index against a basket of majors falling around 0.5% to 97.072. The single currency, the euro, consolidated some gains against the greenback closing at $1.1251. The British pound marginally stronger, closing at $1.2696 against the dollar, as risks of a hard Brexit contained further gains. Yesterday saw yet another volatile session for USDZAR spot with short-term vols surging higher. Investors continue to look for opportunities to get protection against any further short-end sharp swings in USDZAR spot as broader EM sentiment remains negatively skewed amid ongoing trade tensions between US and China. We start the day with 1-month atm vol at 14.72 % (mid) (ABSA).
Wall Street posted the largest one-day gains since early January, lifting global equity stocks as Powel’s comments boosted sentiment for riskier assets. Fed Chair Jerome Powel on Tuesday said the central bank will respond “as appropriate” to ongoing trade tensions, dropping his “patience” stance to policy setting. His comments were interpreted as an indication that the Fed could cut rates to support growth and counter the negative effects of trade tensions. Powel’s comments follow those of James Bullard, President of the St. Louis Fed, who had said that a rate cut “may be warranted soon” given the risks to growth posed by trade tensions as well as weak US inflation. EM currencies, except the rand, continued to benefit from a weaker US dollar, which declined by 0.2% against major currencies on expectations for the Fed to cut interest rates. The rand started Tuesday’s trading session on a firm footing at 14.45 against the US dollar, but lost ground ahead of the GDP release, with the -3.2% print sending it to 14.65 by midday. The slide did not stop there (sometimes you would almost feel sorry for the currency), comments by the ANC Secretary-General Ace Magashule at the media briefing post the ANC NEC Lekgotla that the mandate of the SARB should be expanded to include growth and employment, sent the rand to 14.77 against the US dollar by 18:30 (RMB).
Range of the day: 14.60 – 14.90