Daily Commentary - 12 July 2017

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

- USD / ZAR 13.4809 - EUR / ZAR 15.4296 - GBP / ZAR 17.2768 -

Economic Events:

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:

The rand weakened yesterday following in the footsteps of its emerging market peers on looming threats about tighter global monetary conditions. South Africa and Turkey were in the firing line due to their respective political situations. The Rand has lost between 4% and 10% of its value against other risk currencies in the past month, with 4% being against other emerging market currencies and 10% against the dollar bloc currencies of AUD ,NZD and CAD. In 2013 the rand was part of the “Fragile 5” emerging market currencies because of its exposure to Fed policy tightening due to SA’s large current account deficit. SA’s deficit problem has improved but the hope that this would take it off the target list seems in vain as politics has now replaced economics. Foreign investors seem to see the rand weakness as an opportunity. While sentiment locally has become very bearish, foreigners have been picking up bonds aggressively.

This morning the rand is stronger due to a weaker US dollar which is under pressure in the wake of political noise from the White House. It does have the potential to move aggressively on sentiment this morning, but afternoon trade will be driven by global monetary policy.

Yesterday’s manufacturing production revealed y/y growth of -0.8% in May from a previous downwardly revised -4.2% y/y in April. The numbers did, however, come in above Bloomberg expectations of -2.5% y/y. The decline in production volumes was broad-based, with six out of ten major sub-categories recording negative annual growth rates and the rest rebounding somewhat.

Overnight, the greenback was weaker while US Treasuries and gold were steady after markets were rattled by emails that emerged implicating Trump's son who tried to source dirt on Hillary Clinton from a Russian lawyer.

This afternoon Janet Yellen addresses congress and her comments will be watched closely for hawkish rhetoric. Although the Fed indicated at the last meeting that they intended to raise interest rates one more time this year, two Fed officials yesterday spoke with a more dovish tone. One of the board of governors and a known dove, Lael Barnard, said that while the Fed is likely to start shrinking the balance sheet soon, she believes that caution is required with regard to another rate hike. She also cited muted inflation and low wage growth. The other, Minneapolis Fed President Neel Kashkari, who has similar dovish sentiment, said the US economy is not in danger of overheating given low wage growth numbers.

So today market focus will be central banks with the Bank of Canada expected to also hike rates. Trading should be of a cautious nature ahead of these events, with a bias for our local rates to move lower on the back of a stronger rand. UK PMI print is also expected today but otherwise a quiet day on the data front.

Expected range :  13.44 – 13.65