Weekly market brief - 18 January 2018

Currency Outlook

  • “At the time of the last two Fed hikes, the dollar depreciated, implying that, perhaps, in the short term, the market had priced too much into the dollar and US bonds – which resulted in the unwinding of positions.” “Longer term, the 2004 Fed hiking cycle would suggest that if further Fed hikes coincided with higher growth expectations (especially in EM, and commodities in particular)….then South African local markets won’t necessarily be affected adversely by Fed action.” Of course, South Africa faces more challenges now, especially in the fiscal space, than in 2004, but an improved EM growth and commodity outlook, compared to six months ago, is likely to buffer South Africa against US rate hikes.” (The SA Daily, 17 Jan 18, Standard Bank)
  • The rand has failed three times this week to close below the R12.20 level, but firmed to a new 2018 low of R12.1550 after the SARB decision to keep rates on hold. A close below R12.20 on Thursday night could see us approach support around R12.10, wherefter R12.00 could become possible.

Local Data

  • New Vehicle Sales fell 2.4% y/y to 40 636 units in December.
  • Manufacturing Production rose 1.7% y/y in November, after rising by a revised 2.3% in October.
  • Retail Sales rose by 8.2% y/y in November, jumping far ahead of expectations, after increasing by a revised 3.5% in October.

Interest Rate Outlook

  • The SARB kept the Repo Rate unchanged at 6.75%, with 5 of the 6 SARB Members voting for no rate change and 1 Member opting for a 25-basis point cut.
  • The SARB’s rate forecasting model’s trajectory has changed since the last meeting, projecting two rate increases of 25 basis points each by 2019. However, SARB Governor Lesetja Kganyago implied that all factors between now and the next MPC would be considered and that the models projections are only a guideline.

International News

  • Underlying US consumer prices recorded their largest increase in 11 months in December amid strong gains in the cost of rental accommodation and health care, bolstering expectations that inflation will gain momentum this year.
  • Euro area annual inflation was 1.4% in December 2017, down from 1.5% the previous month. In December 2016, the rate was 1.1%.
  • China's economy grew 6.9% in 2017, beating the government target of around 6.5%, the country's statistics bureau said on Thursday.

Precious Metals

  • Gold reached a four-month high of $1 345/oz on Monday driven mainly by a weaker dollar.
  • Gold fell to $1 323.7/oz on Thursday as the dollar strengthened after stronger-than-expected economic data from the United States.

Base Metals

  • 3m copper rose to $7 262/t earlier this week as the dollar weakened.
  • 3m nickel fell to $12 490/oz on Thursday.

Oil

  • Brent rose to a three-year high of $70.37/bbl earlier this week, supported by ongoing output cuts led by OPEC and Russia. However, a rise in US and Canadian drilling activity that pointed to higher future output in North America capped gains.
  • US crude inventories fell by 5.1 million barrels to 411.5 million in the week ended 12 January, according to the American Petroleum Institute on Wednesday.