Daily Commentary - 13 July 2017

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

- USD / ZAR 13.2332 - EUR / ZAR 15.0997 - GBP / ZAR 17.1170 -

Economic Events:

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

14-July: US CPI ; University of Michigan Sentiment

Market Commentary:

The rand has pulled back strongly and has strengthened by more than 40 cents since Tuesday’s high. The USDZAR is firmly below its 200-day MA again, and looks set to return to the 12.70 – 13.20 range. This is mainly due to a reflection on a better global risk-on environment on Yellen’s comments, however, the relative underperformance of the rand the past week has also reversed. There was a clear indication that the negative sentiment in the rand was coming to an end, at least for now. Yellen’s comments was more dovish than expected and she was relatively upbeat about the economy but did not completely dismiss the recent slowdown in inflation as an aberration, while repeating the view that the peak Fed funds rate in this cycle will not have to be very high.

EM currencies have been some of the best performers, jumping 1% - 2% and core markets have rallied aggressively in response.  Chinese trade data (exports up 17% and imports up 23%) further encouraged risk-on gains and this keeps the rand geared for further strength this morning. Eurozone industrial production for May was the strongest in almost a year at 1.3% m/m, above expectations of 1.0% m/m and up from 0.3% m/m in April by stronger hard data.

Local markets will start to focus on the SARB MPC meeting next week and expectations are for the SARB to keep rates unchanged at 7.00%. This should support the rand further as South African due to lower inflation and higher real interest rates. Local sentiment is such that we doubt everyone is going to give up on the short rand trade.  Fundamentals, in contrast, still support an even stronger rand. The implication of these offsetting forces will probably be ongoing rand volatility, even if global markets settle back relatively quickly. Today’s data and events calendar is relatively light and while there is a string of US data due tomorrow, there is nothing in the next few weeks that can compare with the recent combination of Yellen, non-farm-payrolls and the ANC policy conference.

The BER consumer confidence index came in at -9 pts for Q1:17 from a previous -10 pts in Q4:16 and below its long-run average of 4 pts. Given that South Africa is in a technical recession, this was unsurprising. PCE particularly remains in contraction due to very low depressed demand. The index performed marginally better than the previous quarter, perhaps reflective of disinflationary pressure adding to consumers’ purchasing power. However, with food prices still growing at 7% y/y, disposable income for low income households remains under pressure. Consumer confidence, disposable income, and therefore consumption is expected to remain under pressure due to poor economic growth and high unemployment. Stats SA will be releasing the May mining production data later today. Bloomberg consensus is for production to have continued expanding in May to 2.2% y/y from 1.7% y/y in April. The recent Q1:17 GDP data revealed that all sectors had contributed negatively towards GDP, except for mining and agriculture. The mining sector contributes around 7.2% of GDP and contributed 0.9 pps to GDP growth in Q1:17. If mining growth comes through in line with consensus, we’d expect the sector to continue adding positively to growth in Q2:17.

Range for the day:13.15-13.35