Daily Commentary - 10 July 2017

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

- USD / ZAR 13.3305 - EUR / ZAR 15.2196 - GBP / ZAR 17.1836 -

Economic Events:

10-July: SA BER Consumer Confident

11-July: SA Manufacturing Production

12-July: EC Industrial Production - US FED releases Beige Book

13-July: SA Mining Production - US PPI ; Jobless Claims

14-July: US CPI ; University of Michigan Sentiment

Market Commentary:

South Africa's rand firmed slightly against the dollar early this morning , recouping some of last week's losses after strong U.S. employment data kept emerging market currencies on the back foot. The rand opened at 13.38 against the greenback and has been trading safely in a range between 13.30 -13.54 since last Wednesday. The general feeling in the market is that there was an overreaction to the SARB nationalisation talk. The public protector’s order on the SARB’s powers, meanwhile, is facing increasingly harsh opposition as even Speaker Mbete has decided to join the court challenge. However, none of this has filtered through into local markets as the rand, bonds and even CDS continue to languish.

Globally, there is a lot of talk regarding policy tightening and this will surely attract even more attention than usual in Yellen’s semi-annual address to Congress, this coming Wednesday. She is broadly expected to guide the market towards expecting the Fed balance sheet unwind to begin in September. Meanwhile, while we usually do not care about Canadian monetary policy, if the Bank of Canada goes through with its first hike since the crisis on Wednesday, then the yields pressure may mount even further. On the contrary, the Bank of Japan on Friday fought back against the rise in yields by providing massive liquidity. This has not, however, been enough to offset the pressure from the more important Fed and ECB.  As expected, the G20 had no impact on currency markets. President Trump clearly has his differences with other world leaders but this was papered over in the official communication.

With the ANC policy conference done and dusted, the political noise should die down. With parliament joining the ranks of those giving its support to the SARB, politically, the right kind of statements are being made, which should encourage foreign investors to start buying bonds. In the primary market, Friday's inflation-linked bond auction proved disappointing, with only R205m of the R650m bonds on offer being allocated. The recent sell-off in the nominal market could be one of the factors for the poor auction as real yields are expected to move higher. It's hard to make a decision based on one auction with the trend being more important. That said, if we do get some more stability in the nominal space we could see real yields grind lower.

Locally, focus this week will be on manufacturing data to be released on Tuesday and mining data due out on Thursday. Stocks were set to open higher at 0900, with the JSE securities exchange's Top-40 futures index up 0.3 percent. In fixed income, the yield for the benchmark government bond due in 2026 dipped 3 basis points to 8.895 percent.

Our range for the day: 13.35 - 13.55