Daily Commentary - 20 July 2017 | Merchant West

Daily Commentary - 20 July 2017

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

- USD / ZAR 12.9649 - EUR / ZAR 14.9144 - GBP / ZAR 16.8088 -

Economic Events:

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 retreated yesterday  despite better than anticipated inflation and retail figures, as some investors booked recent profits ahead of an interest rate decision today. By 18h00 the rand had weakened 0.29 percent to 12.9300 per dollar, down from a close of 12.8925 previously and after gaining in five straight previous sessions. Local data showed consumer inflation at its lowest in 19 months and well below the Reserve Bank's upper target of 6 percent, prompting some investors to price-in a higher probability of a rate cut. The bank has hiked rates by 200 basis points since 2014 but over the last 12 months has kept them on hold at 7 percent, saying its tightening cycle had come end. Analyst at Credit Suisse Carlos Teixeira said falling inflation and the resilient currency justified a rate cut. "There is sufficient cushion in the forecast profile for inflation to withstand some renewed currency weakness, which would not be triggered by a cut of 50 basis points," Teixeira said.Elize Kruger of NKC African Economics said while she forecast inflation to remain below 5 percent for eight of the next 12 months, the high likelihood of downgrade of the country's local debt rating to sub investment would keep the bank cautious."I see a local currency downgrade by year-end and that will see the rand slide. And since the initial downgrades very little has developed positively," Kruger said.

 

On the domestic data front:

 

South Africa's headline consumer inflation slowed more than expected to 5.1 percent year-on-year in June from 5.4 percent in May, data from Statistics South Africa showed on Wednesday. Economists polled by Reuters had forecast a 5.2 percent year-on-year inflation print. On a month-on-month basis, inflation slowed to 0.2 percent in June from 0.3 percent in May. Core inflation, which excludes the prices of food, non-alcoholic beverages, petrol and energy, was at 4.8 percent year-on-year in June, unchanged from in May, while on a month-on-month basis the rate rose to 0.4 percent in June from 0.1 percent in May.

 

On the international data front:

 

U.S. homebuilding surged to a four-month high in June, but construction activity remains constrained by rising lumber prices and labor and land shortages. June's better-than-expected increase in housing starts ended three straight months of declines, offering hope that investment in homebuilding was only a modest drag on economic growth in the second quarter. "A lack of workers is limiting the ability of builders to build, and input costs are also an issue," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "I don't expect this part of the economy to add greatly to growth going forward."Housing starts jumped 8.3 percent to a seasonally adjusted annual rate of 1.22 million units, the highest level since February, as both single-family and multi-family construction rebounded after a recent slump, the Commerce Department said on Wednesday. Economists had forecast groundbreaking activity rising to a 1.16 million-unit rate last month. Starts rose 2.1 percent on a year-on-year basis .

The euro held near a 14-month high against the dollar this morning as investors look to hints from the European Central Bank on tapering of its stimulus, while the yen barely budged after the Bank of Japan kept monetary policy on hold. The ECB is expected to lay the groundwork for an autumn policy shift when it meets today, emphasising improved growth while trying to temper expectations after previously setting off a mini-tantrum in financial markets. ECB President Mario Draghi opened the door to policy tweaks in a speech in Sintra, Portugal, in late June, leading to expectations that the ECB is ready to announce cuts in its asset purchasing programme. The euro is now at $1.1515, backing off a tad from Tuesday's $1.1583, its highest level since May 2016 but still maintaining gains of 3.0 percent since Draghi's Sintra speech. While most market players expect an announcement of tapering from the ECB's next meeting in September, a move this week is not completely ruled out.

 

The euro held near a 14-month high against the dollar this morning as investors look to hints from the European Central Bank on tapering of its stimulus, while the yen barely budged after the Bank of Japan kept monetary policy on hold. The ECB is expected to lay the groundwork for an autumn policy shift when it meets today, emphasising improved growth while trying to temper expectations after previously setting off a mini-tantrum in financial markets. ECB President Mario Draghi opened the door to policy tweaks in a speech in Sintra, Portugal, in late June, leading to expectations that the ECB is ready to announce cuts in its asset purchasing programme. The euro is now at $1.1515, backing off a tad from Tuesday's $1.1583, its highest level since May 2016 but still maintaining gains of 3.0 percent since Draghi's Sintra speech. While most market players expect an announcement of tapering from the ECB's next meeting in September, a move this week is not completely ruled out. (Reuters)

Our range for the day : R12.90 - R13.00