Daily Commentary - 14 May 2018

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

USD / ZAR 12.2339 - EUR / ZAR 14.6564 - GBP / ZAR 16.6181 -

Economic Events:

14 May : No data of real importance

15 May : EC GDP - US Empire Manufacturing ;Total Net TIC flows

16 May : EC CPI Data - US Mortgage Applications - SA Retail Sales - US Housing Starts ; Industrial Production

17 May : US Jobless Claims

18 May : EC ECB Current Account ;Trade Balance

Market Commentary:

Emerging market currencies stumbled last week after President Donald Trump announced that the US would depart from the Iran weapons deal. Furthermore, “The United States threatened on Sunday to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational” (source: Reuters). However, the pressure on emerging markets subsided towards the end of the week following a weak inflation data release from the US that came in well below market expectations. US core CPI remained flat at 2.1%, reducing the likelihood that the US Federal Reserve with continue to taper easy monetary policy. The rand, along with other emerging market currencies recovered on Friday and appears more stable going into this trading week. In the absence of any significant local events, the rand`s trajectory will be largely determined by international factors.

In the US market, “The dollar’s recent rally ran out of steam on Monday with U.S. yields sinking as investors wound back expectations that the U.S. Federal Reserve will launch a series of rapid rate hikes this year” (source: Reuters). The dollar index, which tracks the greenback against a basket of six major currencies, traded down 0.15%.

In the European market, the euro traded slightly higher  on the back of a weaker US dollar. However, political uncertainty has not yet ceased to weigh on the common currency from a longer-term perspective. Markets are keeping a close watch on how the political environment in Italy will unravel. “Italian government bond prices fell and their yields rose sharply last week due to uncertainty about the country’s political future” (source: Reuters).

In the UK market, the pound has also benefitted from the weaker US dollar, recovering from losses earlier in the week. The pound came under pressure at the start of last week as the Bank of England failed to raise interest rates and revised growth expectations downward. Despite speculation on future interest rate movements, the recent strength may be sustained in the short-term.

In other news, while investors have been focused on a strengthening US dollar and rising Treasury yields, a weaker Chinese yuan also threatens to heap pressure on emerging market assets that have already wiped out their gains for the year. That’s because a pause in the yuan’s appreciation path would challenge a clutch of developing economies by hitting their trade competitiveness against China, according to Morgan Stanley (source: Moneyweb).

Our range for the day : R 12.1000 – R12.3500