Daily Commentary - 06 July 2018

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

USD / ZAR 13.5709 - EUR / ZAR 15.8915 - GBP / ZAR 17.9581 -

Economic Events:

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

Market Commentary:

Local front:

South Africa's rand opened weaker on Friday, giving back some of the gains from the previous session as investors treaded cautiously ahead of employment data in the United States. At 08h50 the rand was 0.18 percent weaker at 13.5600 per dollar, having rallied as far as 13.5075 overnight after minutes from the Federal Reserve's June meeting struck an even tone, spurring some short-buying while the greenback remained on pause. Since touching the 14.00 psychological barrier last week to its weakest in seven months the rand has recovered, pushing below successive technical resistance points at 13.80 and 13.60 in a broad emerging market relief rally. With a brewing trade war between the United States and China and rising lending rates in developed markets, sentiment towards EM's remains soft, leading traders to limit large bets and pick up profits on short-term strategies.  On Friday a Reuters poll found the median forecast for the rand in 12 months showed it would trade around 13.50, although the range of forecasts was wide with the most bearish forecaster saying it will weaken to 15.00 per dollar.

International front:

Major currencies trod water early on Friday as investor caution prevailed ahead of Washington's implementation of its threatened tariffs on Chinese goods and the U.S. jobs report due later in the day. The United States is due to begin collecting tariffs on $34 billion in Chinese goods at 0401 GMT on Friday. Focus has shifted to how China will retaliate and the potential volatility that could cause in the global financial markets. “As Wall Street's gains have shown, the markets have been able to price in the tariff implementation for the most part. But there is always the risk of President Trump tweeting something out of the blue, and we also have to worry about the subsequent tariffs," said Yukio Ishizuki, senior currency strategist at Daiwa Securities in Tokyo.

U.S. President Donald Trump warned that subsequent rounds of tariffs could apply to more than $500 billion of Chinese goods - roughly the amount that the United States imported from China last year as the world's two largest economies hurtled toward the start of a trade war. The dollar index against at basket of six major currencies was a shade lower at 94.362 after slipping to 94.177, its lowest since June 26, the previous day.

"Participants will be looking to shift their attention from trade matters to the U.S. non-farm payrolls and if the jobs report is strong, dollar/yen stands poised to rise and break out of its recent range," Ishizuki at Daiwa said. The U.S. Labor Department is expected to report nonfarm payrolls increased 195,000 in June after surging by 223,000 in May. Monthly average hourly earnings likely rose 0.3 percent, which would lift the annual increase to 2.8 percent from 2.7 percent in May.

EURUSD forecast:

The U.S. dollar's recent resurgence will last another three months, and possibly up to six, but its dominance will fade next year, a Reuters poll of currency strategists showed. With a brightening economic backdrop outside the United States and an expected huge U.S. budget gap from aggressive tax cuts passed by Congress, Reuters foreign exchange polls had until April been forecasting the dollar to underperform in 2018.But the greenback, which lost over 10 percent in 2017, has gained about 3 percent so far this year as major economies lost momentum. With risks of a global trade war increasing daily, investors have taken shelter in U.S. assets.

Currency speculators increased bullish bets on the dollar to the largest since mid-May last year at the end of June, according to Commodity Futures Trading Commission data released on Friday. That run up in the dollar is predicted to continue this year as the U.S. Federal Reserve is expected to deliver interest rate hikes steadily through this year and next, according to the poll of over 70 strategists taken June 2-5."With (U.S. President Donald) Trump and the Fed forging ahead with their domestic agendas, expect the dollar to stay supported and the risk environment to stay fragile," noted Chris Turner, global head of strategy at ING.

"The period of synchronized global growth underway for the past year looks to be giving way to a period of more U.S.-biased global growth. With this shift, we want to avoid being underweight U.S. dollars," noted Mike Ryan, chief investment officer for the Americas at UBS. With the U.S. economy sprinting ahead, the Fed made its tone slightly more hawkish at its recent meeting even as the European Central Bank made clear interest rates will not rise in the euro zone until late next year. That widening policy gap between the Fed and other major central banks is expected to be one of the main drivers of dollar strength going forward, according to a majority of analysts who answered a separate question.

The euro, which has fallen out of favour in recent months, is down close to 3 percent this year, the currency's worst half-yearly performance since 2015.The single currency is forecast to recoup much of those loses against the dollar by the end of this year, however, and be up over 4 percent in 12 months. The euro was forecast at 1.19 in six months, almost a 2 percent gain from around 1.17 it was trading at on Thursday. It was forecast to rise to 1.22 in a year. Sterling, which has taken a pounding in recent weeks, will move little in the run up to Britain's departure from the European Union next year and then gain ground on the U.S. dollar post-Brexit.

Our Range for the day: R13.4000 - R13.7500