Daily Commentary - 03 July 2018

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

USD / ZAR 13.7183 - EUR / ZAR 15.9911 - GBP / ZAR 18.0929 -

Economic Events:

03 July : EC PPI Data ; Retail Sales - US Factory Orders

04 July: EC PMI Data

05 July: UK Initial Jobless Claims ; PMI Data

06 July : US Non-Farm Payrolls ;Average earnings ; Trade Data

Market Commentary:

Local Currency front:

South Africa's rand weakened on Monday after the dollar rose as investors ramped up bets that escalating trade tensions between the U.S. and its trade partners will hurt the world's biggest economy the least for now. The dollar received another boost from better-than-expected U.S. manufacturing data. At 17h21, the rand traded at 13.9100 per dollar, 1.31 percent weaker than its close on Friday. The currency has weakened 12 percent versus the greenback year to date, hurt by a combination of trade jitters, prospects of higher U.S. interest rates and concerns over the health of the domestic economy.

"The rand is expected to pull back in the interim, but remain within a weak range for most of this year – our base case is now for the rand to trend between R13.00 to R14.00/$ over the next six months," Nedbank analysts Reezwana Sumad and Walter De Wet said in a report. "One aspect that would warrant a blow-out above the R14.00 level is a continuation or deterioration in geopolitical tensions which would maintain a strong dollar, as the dollar behaves as a safe-haven asset during times of conflict." Global trade tensions are growing with the United States and China set to impose new tariffs on each other's imports this week and each side threatening more unless the other backs down. On the local front, a closely watched survey of South African manufacturers showed a further decline in business activity in June, pointing to lingering weakness in Africa's most industrialised economy.

In fixed income, the yield for the benchmark ZAR186 paper due in 2026 rose 6 basis points to 8.895 percent. South African stocks ended weaker on the day, led by resource shares as commodity prices fell.The Top-40 index was down 1.04 percent to 50,979 points and the broader All-Share index shed 0.78 percent to 57,159 points.

Local Data front:

A closely watched survey of South African manufacturers showed a further decline in business activity in June, pointing to lingering weakness in Africa's most industrialised economy. South Africa's new President Cyril Ramaphosa is trying to reverse a decade of economic stagnation under his predecessor, Jacob Zuma. But recent economic data, including first quarter gross domestic product and mining output, have disappointed. South Africa's seasonally adjusted Absa Purchasing Managers' Index (PMI) fell to 47.9 points last month from 49.8 in May amid declines in new orders, business activity and employment, Absa said in a statement on Monday. Among factors weighing on manufacturers' minds, the statement cited controlled power outages by state utility Eskom, fears of a global trade spat and rising cost pressures linked to a weaker rand.

International front:

The dollar eased marginally against its peers on Tuesday, as the euro steadied after partners in Germany's coalition settled a row over migration that had threatened to topple Chancellor Angela Merkel's government.

The euro was little changed at 1.1630 against the Greenback, after shedding 0.45 percent overnight. The single currency had slipped on Monday after German Interior Minister Horst Seehofer offered to resign, but it later steadied when his Christian Social Union (CSU) party reached a deal with Merkel's Christian Democrats (CDU) over illegal immigration, and the resignation threat was withdrawn. "Concerns towards the euro have ebbed for the time being. But the underlying immigration and refugee theme will continue to remain a potential risk factor," said Shin Kadota, senior strategist at Barclays in Tokyo. The dollar remained broadly supported, meanwhile, as trade tensions propped up the greenback against commodity currencies, like the Australian dollar, and emerging market currencies whose economies are most vulnerable to a downturn in trade.

The dollar index against a basket of six major currencies inched down 0.1 percent to 94.913 after gaining about 0.45 percent the previous day. “There’s a strong element of 'risk off' generated by trade concerns behind the dollar's latest rise. That said, the dollar has managed to gain only as emerging market and commodity currencies have slid due to risk aversion," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. "A currency of a country with a large current account deficit is not usually a choice destination during risk aversion, but the dollar is high in liquidity, which is a draw."

The Chinese yuan remained volatile on the back of nervousness ahead of July 6, when U.S. tariffs on Chinese exports are due to take effect. Commodity-linked currencies such as the Australian dollar, which is sensitive to shifts in sentiment towards China, have also felt pressure from trade conflict concerns. The Aussie was down 0.15 percent at $0.7330 and near a 1-1/2-year low of $0.7311 plumbed on Monday after the Reserve Bank of Australia (RBA) kept interest rates unchanged and signaled a steady outlook for some time to come.

Our range for the day : R13.6500 - R13.9000