Daily Commentary - 04 August 2017

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

- USD / ZAR 13.3657 - EUR / ZAR 15.8803 - GBP / ZAR 17.5940 -

Economic Events:

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

Market Commentary:

With South Africa facing further credit ratings downgrades, a Reuters poll found that a further two percent fall could be expected for the ZAR over the next six months. From the 45 strategists polled by Reuters, the suggested median was a slip to 13.40 in three months, and an eventual move to 13.50 in six months against the US dollar. Bets on a weaker dollar have also aided in subduing the bearish ZAR outlook. Following the earlier downgrade of South Africa`s foreign currency debt, the rand denominated debt has now come under threat of downgrade to “junk” which could see it`s exclusion from vital bond indexes that invest in local bonds. However, the rand has not yet lost all of its carry appeal with the SARB cautious policy approach and only a 25 basis point rate cut to 6.75%. On Thursday, the rand erased the majority of its previous gains as it weakened to a three-week low, while a cautious market anticipates the outcome of the motion of no-confidence in president Jacob Zuma. With President Jacob Zuma having survived eight previous motions of no-confidence since the start of his presidential term, the market eagerly awaits the decision of Parliamentary speaker Baleka Mbete on whether the vote will allow for a secret ballot. The market will also shift its focus towards the US non-farm payrolls date coming out today.

In the United States, political upheaval and softer inflation is casting a shadow over the odds of another interest rate hike by the Federal Reserve, seeing the dollar falling in excess of ten percent from its January highs. The mighty dollar was dealt a further blow by Europe`s economic growth and President Donald Trump`s legislative failures. The dollar is seeing its first five-month losing streak since the year 2011. The dollar remained under pressure throughout Thursday and short-term speculation remains very bearish. Against the euro, the dollar has almost reached a three year low and has remained on the back foot in the wake of uninspiring and disappointing US economic data, as well as uncertainty surrounding the Federal Reserve`s future tightening policy.  The Federal Reserve has signalled that it expects to raise interest rates once more this year, as well as start unwinding its significant $4.5 trillion portfolio with which it stimulated the US economy following the financial crisis. The dollar's move lower also follows remarks made by President Donald Trump about his preference for a weaker dollar. US markets are looking to find some relief from today`s non-farm jobs report. With regards to the non-farms data being released today, a Reuters poll shows expectations of 183,000 jobs in July, down from 222,000 in June.

The euro is set to end 2017 higher against the dollar, a Reuters poll showed, with the risks skewed more in favour of the single currency, driven by expectations the European Central Bank starts to scale back stimulus. Having lost almost a quarter of its value against the dollar over the last three years, the euro has gained more than 12 percent so far this year, making it the best performing major currency. The euro-zone economy grew 0.6% in the second quarter, matching expectations, lending confidence to the view that the upswing in the single-currency area is  becoming self-sustaining. There was good news for the UK too, with manufacturing growth accelerating for the first time in three months as IHS Markit’s Purchasing Managers’ Index rose to 55.1 for July. The data will be one more piece of the puzzle for policy makers at the Bank of England to mull over when they decide on monetary policy on Thursday. Consumer price growth in the euro area remained steady at 1.3% in July, according to the flash estimate from the European statistics agency. Core inflation, which strips out food and energy prices, rose to 1.2%, the highest level in three months. The data come as policy makers at the European Central Bank are gearing up for a fall debate on the future path of monetary policy. A separate release showed that unemployment in the common currency area fell to 9.1% in June. UK consumer credit growth slowed in June, while still rising 10% from a year earlier. Bank of England policymakers, who meet on Thursday to announce the latest interest-rate decision, have recently taken action to reduce the pace of unsecured leading in the economy (MoneyWeb, 2017) .

Our range for the day :R13.2000 - R13.4500