Daily Commentary - 14 July 2017

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

- USD / ZAR 13.1681 - EUR / ZAR 15.0288 - GBP / ZAR 17.0597 -

Economic Events:

14-July: US CPI ; University of Michigan Sentiment

Market Commentary:

The Rand staged a significant comeback earlier this week on Wednesday, when pressure on emerging markets started to alleviate. This provided a clear display of the Rand`s ability to move aggressively on investor sentiment, according to John Cairns, RMB currency strategist. On Thursday, the Rand found further support when Minister of Finance, Malusi Gigaba unveiled his 14-point plan to revive the South African economy. His plan included a set intervention timeline across multiple sectors and also called on specific ministerial parties. The plan broadly touched on fiscal policy, financial sector and tax policy, leveraged public procurement, recapitalisation of state-owned entities and government guarantees, broader state-owned entity forums, private sector participation framework, costing developmental mandates, energy, SAA, telecommunications, Postbank licensing, Minerals and Petroleum Resources Development Act Amendment Bill, broad-based socio-economic empowerment charter for the SA mining and minerals industry, Regulation of Land Holdings Bill.

On the back of local news, the Rand continued to rake in some gains as emerging market equities surged to 26-month highs on Thursday and investors rushed to take advantage of the risk appetite bounce sparked by dovish comments from U.S. Federal Reserve Chair Janet Yellen. As long as U.S. interest rates consolidate and fears about a move to well north of 2.5% remain in check, the positive tone in emerging markets that prevailed prior to the middle of June should resume, according to Jason Daw, analyst at Societe Generale. There was also reassurance from within emerging markets as Chinese exports and imports rose at a double-digit pace, pointing to the continued trade recovery. The emerging equity index rose almost 1% and was set for its best weekly gain since the middle of March, with bourses in India and Korea hitting record highs and Hong Kong shares rallying more than 1% to two-year peaks. This rally should extend from here, supporting the view that central banks leaning against financial conditions may slow the risk rally, but not derail it.

In the US, Janet Yellen gave dollar bulls fresh hope on the second day of her testimony to Congress. The Fed Chair finally talked up the improvements in the U.S. economy, reminding everyone they still plan to raise interest rates. The dollar rebounded in response versus the euro and Japanese yen. While the greenback failed to turn higher against sterling and the commodity currencies, it still managed to take these pairs off their highs. According to Yellen, the labour market “is quite tight, which causes pressure on wages.” Inflation has fallen but she also believes it is “premature to say the underlying inflation trend is below 2%” because the “risk to inflation is two-sided.” She said, “nothing suggests that the expansion will die anytime soon” and if she’s right, it would foster the Fed’s belief that the downtrend in inflation will be temporary. “If US prices continue to decline, it’ll be hard for the markets to sustain the current mood toward monetary tightening, and some markets are already starting to feel that now,” said Daisuke Karakama, chief market economist at Mizuho Bank in Tokyo.

The Euro led gains on Thursday following a volatile session on expectations that the European Central Bank could send hawkish signals at its meeting next week while the pound also rose after the Bank of England’s Ian McCafferty suggested in an interview with The Times he favoured faster unwinding of quantitative easing. A big question regarding the Euro's next moves lie with the ECB. Are they happy with its recent appreciation? After all a stronger Euro makes Eurozone exports more expensive to the rest of the world which could weigh on activity. Furthermore, a stronger Euro makes imports cheaper which would be expected to weigh on inflation ensuring the Bank's 2% inflation target becomes more threatened.

Range for the day: 13.08 – 13.25