DAILY MARKET UPDATE - 7 JUNE 2019

markets commentary

Merchant West Capital Markets

USD/ZAR 15.0872 | EUR/ZAR 17.0004 | GBP/ZAR 19.1832

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email: treasury@merchantwest.co.za

Market Data:

7 JUNE - SA - Gross Reserves & Net Reserves | US - Change in Nonfarm Payrolls | Unemployment rate

Market Commentary:

A shocking morning to see what happened to ZAR, market moves linked to SARB nationalizing, S&P comments on Eskom and more negative economic news. Market definitely caught off guard and now we see how the rand will settle post this move higher. All eyes on Non-farm payrolls this afternoon, which could push ZAR above 15.20. Expect a bumpy ride on the FX front (BNP Paribas).

The rand has been under the cosh this week, breaching R15.00/$ yesterday. First, there was the poor Q1 GDP. Then, confusion about South Africa Reserve Bank (SARB) independence. ANC Secretary General Ace Magashule this week claimed that the SARB’s mandate must be expanded to include growth and employment, a seemingly baseless and unsupported statement, throwing already unsettled markets into further disarray. As cabinet ministers disagreed with him publicly, the resultant confusion saw the rand drop. Just this week, foreigners have dumped SA bonds to the value of R3.49bn, which was somewhat offset by foreign purchasing of SA equities to the value of R5.73bn. Country risk, as measured by the credit default swaps, soared above 200 bps this week, and rand volatility too rose. SA’s constitution clearly states that “the primary objective of the SARB is to protect the value of the rand in the interest of balanced and sustainable economic growth in the republic”. It further stipulates that the SARB, in pursuit of this primary objective, must perform its functions independently and without fear, favour or prejudice but that there must be regular consultation between the SARB and cabinet minister/s responsible for national financial matters. Electricity production grew 1.8% y/y in April, from a 2.9% y/y contraction in March. Electricity consumption grew 1.6% y/y, from a 2.8% y/y contraction in March. This was a good start to Q2 given that in Q1 the energy sector detracted from GDP. Manufacturing, mining and retail sales data for April next week will shed more light on 2Q (Standard Bank).

The US dollar reversed all gains it had made the previous day with no deal in sight yet between the US and Mexico. President Trump has said that tariffs will be implemented next week if no deal is made. The dollar index, measured against a basket of majors, dropped to a low of 96.782 before closing the day at 97.044. The euro soared once again yesterday thanks to the weaker dollar, breaching the $1.13 level for a second day in a row before retracing. The common currency reached a high of $1.1309 before closing the day at $1.1276. Pound sterling ended the day relatively flat and did not take advantage of the weaker dollar with by-elections and Brexit woes top of mind for investors. The pound reached closed the day just 7pips better at $1.2694 (ABSA).

Range for the day: 14.95 -15.20