Daily Commentary - 21 July 2017

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

- USD / ZAR 12.9813 - EUR / ZAR 15.1264 - GBP / ZAR 16.8684 -

Economic Events:

21-July: No data of real importance

Market Commentary:

Yesterday the SARB decided to do a surprise us by cut of the repo rate by 0.25%, but even this could not break the rand’s resilience. The currency did fall a little bit of course after the South African Reserve Bank reduced its key rate yesterday afternoon to 6.75% from 7% to boost an economy in recession, defying predictions of 20 out of 23 economists in a Bloomberg survey. But it soon reversed most its losses to trade back at R12.9580 per dollar at 19h00 last night, around the same level as before the SARB’s announcement. This morning, it was trading again back above 13.01 at around 13.05, but in no time was able to dip again into the upper 12.90’s. The rand has been one of the main beneficiaries of an emerging-market rally this year, driven by the belief that the US Federal Reserve will only enact rate increases slowly. The high returns on South African bonds mean it’s unlikely to weaken much, especially as the central bank will be cautious about further cuts with inflation near the top of its target range, according to Aberdeen Asset Management and Rabobank (Bloomberg).

On the domestic front:

South Africa's central bank unexpectedly cut its benchmark lending rate for the first time in five years, citing weak growth and easing inflation, and denied any pressure from recent political attacks on its mandate. South Africa's main anti-graft watchdog recommended last month that the central bank mandate be changed to place more focus on growth and not just inflation and protecting the value of the currency, the rand. Central bank governor Lesetja Kganyago, who has launched legal proceedings to counter the watchdog's challenge, said the central bank remained independent and had not come under any pressure to cut rates. He said the regulator eased rates due to weak growth and an improved inflation outlook, but said monetary policy alone would not be enough to spur an economy languishing in recession. "No President past or present, no Minister of Finance past or present has ever attempted to tell the SARB how to go about implementing its mandate," he said. "We are not under any political pressure. The rand fell more than one percent after the decision, before recovering some of its losses to trade 0.5 percent weaker, while government bonds rose more than 10 basis points. The bank also halved its 2017 growth forecast to 0.5 percent, and trimmed next year's projection to 1.2 percent. The recession in Africa's most developed economy is adding to pressure on President Jacob Zuma, who is also handling fallout from credit downgrades and massive corruption scandals that have further dented investor confidence.

On the international front:

The dollar headed for weekly losses on Friday, wallowing at its lowest levels against the euro in nearly two years after what markets perceived as hawkish talk from European Central Bank chief Mario Draghi. But the Australian dollar skidded against the greenback after contrastingly dovish comments from a Reserve Bank of Australia official. The dollar index, which tracks the U.S. currency against a basket of six major rivals, was flat on the day at 94.322, not far from its overnight low of 94.090, its deepest nadir since August 2016. It was down 0.9 percent for the week. The euro caught its breath and steadied at $1.1626 after climbing as high as 1.1659 at one point yesterday, its loftiest level since August 2015. Draghi said that no exact date had been set for discussing any changes to the ECB's ultra-easy monetary programme but did say policymakers would revisit the topic in the autumn. His comments were perceived as "hawkish, even though the ECB didn't tip its hand as to when it will begin balance sheet normalisation and in fact left the door open to additional easing if needed," said Bill Northey, chief investment officer at U.S. Bank Private Client Group in Helena, Montana. The dollar edged up 0.1 percent against the yen to 112.06, after touching an overnight low of 111.48, its lowest since June 27. It was on track to shed 0.4 percent for the week.

No data of any key importance today, but still expect a fair amount of push and pull off both the local MPC Meeting data and most definitely off yesterday’s ECB Meeting.

Our Range for the Day :-    12.9200   -  13.0600