Daily Commentary - 17 July 2017

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

- USD / ZAR 12.9942 - EUR / ZAR 14.8612 - GBP / ZAR 16.9853 -

Economic Events:

17-July: US Empire Manufacturing

18-July: EU CPI- US TIC flows

19-July: SA CPI - US Mortgage Applications - SA Retail Sales - US Housing Starts

20-July: EC ECB Current Account - US Jobless Claims - SA Interest Rate Announcements

21-July: No data of real importance

Market Commentary:

South Africa's rand extended its gains against a weak dollar on Friday, lifted by technical factors and comments by senior U.S. central bank officials about "gradual" tightening, which also helped ignite stocks. At 17h30, the ZAR was fetching 13.03 against the greenback, a hefty gain on the day of almost 1.4 percent to scale its highest level in over two weeks. Technically, the rand has been getting support from momentum indicators which showed it was straying into oversold territory earlier this week, while bets on a modest U.S. Federal Reserve rate hike path have helped to retain its yield appeal.

In fixed income, the yield for the benchmark government bond due in 2026 ZAR186= fell 5.5 basis points to 8.695 percent. Stocks closed higher, with the mining index gaining 0.82 percent after South Africa suspended implementation of a new mining law, which includes raising the level of black ownership in mining firms, pending a court ruling. Mining shares fell to more than one-year lows when Mines Minister Mosebenzi Zwane released the revised mining charter in June, giving resource firms 12 months to meet a new 30 percent minimum for black ownership, up from 26 percent. The benchmark Top-40 index closed 0.54 percent higher at 47,309.26 points while the broader All-share index added 0.56 percent to 53,597.96 points.

International front:

The dollar fell against a basket of major currencies on Friday, after weaker-than-forecast data on consumer prices and retail sales in June raised doubts about U.S. economic growth and whether the Federal Reserve would raise interest rates again in 2017 U.S. consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and soft domestic demand. Economists had forecast the CPI edging up 0.1 percent last month. Its drop of 0.1 percent in May and the lack of a rebound in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory.

"The CPI data begs the question, at what point does transitory become something that is more sustained, in terms of the softness," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York. The dollar index, which tracks the greenback against six major rivals, was down 0.6 percent to 95.152 after earlier falling to 95.132, its lowest since September 2016. U.S. interest rates futures rose as traders pared their view that the Federal Reserve would increase rates again in 2017. "Moderating price pressures suggest the Fed may be less willing to lift U.S. borrowing costs for a third time this year," Omer Esiner, chief market analyst at Commonwealth FX in Washington, said in a note. The U.S. dollar remained broadly on the back foot against major currencies.

Against the Japanese yen, the greenback was down 0.65 percent to 112.53 after hitting a near two-week low of 112.28. "Dollar-yen has got a lot more downside and it could easily go to 110 before the summer is out, in fact the next few weeks, especially with U.S. yields heading lower," Franulovich said. The higher yielding Aussie and New Zealand dollars jumped, with the Australian dollar hitting a near 15-month high as risk appetite was robust with global stock markets hitting record highs and after dovish comments from global policymakers. The Aussie was 1.23 percent higher against the greenback at $0.7821. South Africa's rand hit a two-week high against the greenback. The euro was up 0.62 percent against the greenback to $1.1466 and sterling was 1.18 percent higher at $1.3088, after hitting $1.3093, its highest since September, 2016.

On the International data front:

The Labour Department said the unchanged reading in its Consumer Price Index came as the cost of gasoline and mobile phone services declined further. CPI dropped 0.1 percent in May and the lack of a rebound in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory. Policymakers are confronted with benign inflation and a tight labour market as they weigh a third rate hike and announcing plans to start reducing the central bank's $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities.

In the 12 months through June, the CPI increased 1.6 percent - the smallest gain since October 2016 - after rising 1.9 percent in May. The year-on-year CPI has been retreating since February, when it hit 2.7 percent, which was the biggest increase in five years. The so-called core CPI, which strips out food and energy costs, edged up 0.1 percent in June, rising by the same margin for three straight months. The core CPI increased 1.7 percent year-on-year after a similar gain in May.

The Fed has a 2 percent inflation target and tracks a measure which is currently at 1.4 percent. Financial markets were pricing in a 47 percent chance of a 25 basis point rate hike in December, down from 55 percent before the data, according to CME Group's FedWatch program. As a result, the dollar fell, briefly touching a 10-month low against a basket of currencies.

Our range for the day :  12.92 - 13.15