Daily Commentary - 21 June 2017

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

- USD / ZAR 12.8180 - EUR / ZAR 14.3515 - GBP / ZAR 16.4168 -

Economic Events:

21-June: SA CPI - US Existing Home Sales

22-June: US Jobless Claims and Consumer Confidence

23-June: EZ PMI - US PMI and New Home Sales

Market Commentary:

As expected, the public protector’s suggestion of changing the SARB’s objective in the constitution continues to generate much talk with the ANC opposing the idea and unions supporting it.  Standard & Poor warned that a change could lead to further downgrades if the government meddles with the “critical” independence of the country’s central bank.  The rand’s movements yesterday showed no signs of being impacted by any of this and foreigners returned as net buyers into the bond market, showing they are not panicking.  It remains under pressure due to dollar strength and oil price decline.

Oil remains under pressure as Brent slumped to a six month low under $46/bbl yesterday.  This is due to market fears that supplies remain abundant even with OPEC keeping strictly to its production cut targets.  Libya and Nigeria who are exempt from OPEC led production cuts due to conflict in their respective countries, have recorded increased production, making it more difficult to shrink supplies worldwide.  Even though SA is a major oil importer, a lower oil price is not a good thing for the rand due to three reasons.  One, it is being used in the market as a broader proxy for what is going on in commodities.  Two, it has generated risk aversion, with Wall Street dropping back overnight.  Thirdly, it is linked to continued gains in the dollar.  A point to note however is that there is doubt that the oil move will run much longer and will probably not generate sustained rand weakness.

What seems more of a worry is the USD, with the past month’s weakness being overdone.  It therefore does look quite easy for EUR/USD to drop back under 1.10 or even under 1.08.  We do need it to break below parity in order to generate multi-month rand weakness.  A sharp dollar adjustment however could certainly keep USD/ZAR steadily biased upwards over the next few weeks.

The 1Q17 South African current account deficit was published at 2.1% of GDP, slightly higher than expected.  Today CPI will be published at 10 am with a print within the target band expected.  Will it surprise to the downside again?  Should the number be lower than expected, bonds will start pricing in a rate cutting cycle with more certainty.

In the US , the outlook for inflation and future financial stability are emerging as duelling concerns at the heart of a debate at the US central bank over how fast to proceed on future rate hikes.

A battle over the lucrative euro-clearing market heated up on Tuesday, with the European Central Bank sounding support for the relocation of clearing just as Bank of England Governor Mark Carney warned it could damage financial stability.

Expected range today : 12.90 - 13.20