Daily Commentary - 03 August 2017

Contact Merchant West Capital Markets on: (+2711) 305-9500 or treasury@merchantwest.co.za

- USD / ZAR 13.2696- EUR / ZAR 15.7099 - GBP / ZAR 17.5508 -

Economic Events:

03-August: EC Retail Sales - US ISM Non-Manf. Composite

04-August: US Change in Nonfarm Payrolls ; Unemployment Rate ; Trade Balance

Market Commentary:

Moody`s recently issued a report highlighting the prevailing structural growth concerns and fears surrounding the independence of the South African Reserve Bank (SARB). The report followed action from the Public Protector`s office after Busisiwe Mkhwebane instructed that Parliament must change the Constitution to make SARB's focus the “socio-economic well-being of citizens” instead of inflation. Ratings agencies have cited the independence of the SARB as a key strength, and any move to erode that could lead to further downgrades, particularly after President Jacob Zuma removed Pravin Gordhan as finance minister in March. The bank has a duty to protect South Africa’s currency in the interest of balanced and sustainable growth. We are mandated to protect financial stability in South Africa,” Lesetja Kganyago, Governor of the SARB said. "Should the agency decide to downgrade SA, the local and foreign currency credit ratings will be in the sub-investment category - this will leave only S&P to downgrade for the country to be removed from the coveted World Government Bond Index," said Ilke Van Zyl, economist at RMB. Moody’s is scheduled to decide on SA’s credit rating next Friday August 11, while S&P is expected to release its decision on November 24. With global FX carry indices sitting at their highest since 2014, valuations of EM currencies and yields are becoming more compelling," said Van Zyl. South Africa’s rand inched weaker on Wednesday as traders anticipated further weakness as the unit broke through successive technical levels in an economy in recession with possible ratings downgrades on the horizon. At 08:13 the rand traded 0.13% weaker at 13.2975 per dollar compared with its close of 13.2800 overnight in New York. The rand tumbled to 13.3100 in the previous session, its weakest in three weeks, following a warning by the central bank governor that the economy remained under severe strain. The rand has weakened more than two percent since the Moody’s warning, quickly breaking through technical support levels at 13.00, 13.1200 and 13.3000. Moody’s rates South Africa’s debt at the lowest investment grade level with a negative outlook. It could move on the rating later this month. A downgrade would mean all three main agencies would rank South Africa at “junk”. In political news, Parliamentary speaker Baleka Mbete is expected to announce her decision on a secret ballot before the end of this week.

The dollar inched away from a 15-month low versus a basket of currencies on Wednesday, but was still looking wobbly due to doubts about whether there will be another U.S. interest rate rise this year. The dollar index, which measures the greenback's value against a basket of six major currencies, rose about 0.1 percent to 92.940. On Wednesday, it slid to 92.548, its weakest level since May 2016. The near-mirror image fall in the dollar has been especially pronounced in recent weeks, stemming in part from concerns that President Trump’s political problems will hamper his ability to pass a major tax reduction or an infrastructure bill.

Europe’s common currency traded at about USD1.1830 on Wednesday, extending an advance after breaching the key USD1.1714 mark on July 26 for the first time since August 2015. The euro is coming off a five-month rally, its longest since 2013, propelled by interest-rate differentials that have gone in its favour and broad dollar weakness. The 19-nation currency still has room to run, according to analysts at Canadian Imperial Bank of Commerce and JPMorgan Chase & Co. They point toward USD1.1877 and USD1.2043, the euro’s lowest levels of 2010 and 2012, respectively, as technical levels that loom as near-term targets. The euro reached USD1.1868 on Wednesday, its strongest since January 2015. The options market shows that traders are gearing up for more strength, with demand growing for calls, which give the right to buy. "The domestic fundamentals in the eurozone are robust, and the market is gradually repricing that into the currency," said Bipan Rai, a strategist at CIBC. Looking beyond the lows of 2010 and 2012, Niall O’Connor, a technical analyst at JPMorgan, pointed toward USD1.2167 as another level to monitor. That figure marks the 50% retracement of the decline from the euro’s 2014 high just shy of USD1.40, he said. Further euro upside could be a grind, however, amid technical signals that the currency is "as overbought as you can get," O’Connor said.

The pound rose versus the dollar after data showed British manufacturing grew faster than expected in July, bolstered by the strongest jump in export orders in seven years. Sterling is on track for its third day of gains as a report showed the IHS Markit’s factory Purchasing Managers Index climbed to 55.1 in July from 54.2 in June, above analysts’ estimates of 54.5. The rally beyond USD1.323 is partly the result of UK economic resilience, and partly a reflection of the ongoing political upheaval in the White House. While yesterday’s UK manufacturing PMI inspired hope that the nation’s economy bounced back at the beginning of the third quarter after struggling for the first half of 2017, the latest UK news has actually been negative, showing a surprising slowdown in UK construction sector activity.

Our Range for the day:  R13.1000 - R13.4000