Daily Commentary - 24 July 2018

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

USD / ZAR 13.4604 - EUR / ZAR 15.7153 - GBP / ZAR 17.6379 -

Economic Events:

24 July : SA Leading Indicator - EC Markit manufacturing PMI - US Markit manufacturing PMI

25 July: US MBA Mortgage Applications

26 July: SA PPI - EC ECB Main Refinancing Rate

27 July : US GDP ;University of Michigan Sentiment

Market Commentary:

South Africa's rand stretched losses early this morning, with sentiment dampened after state power firm Eskom reported a $171 million loss, with emerging market investors looking elsewhere for returns. At 08h20, the rand was 0.25% weaker at 13.5190 per dollar. After a brief rally at the end of the previous week the currency is back on the ropes, pressured by the patchy domestic growth outlook and ongoing uncertainty about global trade, which has seen investors seek out safety in developed markets. Yesterday, Eskom, which supplies more 90% of the country's power and survives on 270 billion rand of state-guaranteed debt, released financial results showing it still remains a major threat to any economic turnaround. While the rand managed to remain below the 13.60 mark, testing the high of the day during early N.Y. trading sessions of $/R13.57, with the 13.50’s remaining as a recent sell target for investors weary of the currency's volatile swings, with many traders starting to say that it is likely breach the mark this week.

Local Bond Market:

After nearly three months of unabated selling, foreign investors are making a cautious return to South Africa’s bond market. Non-residents were net buyers of the country’s government debt for the second week running last week as emerging-market sentiment improved and inflation in South Africa fell short of analysts’ estimates. The inflows have been small: about R1.6bn since 9th June, compared with almost R60bn of outflows in the second quarter, according to Johannesburg Stock Exchange data. But it marks a turnaround from 11 straight weeks of outflows sparked by a stronger dollar and rising US Treasury rates. “StabiliSation of sentiment has led to a reversal of flows back into bond markets” across most developing nations, said Richard Segal, a London-based senior analyst at Manulife Asset Management.

International front:

The dollar is ticking up slightly this morning, adding to gains made in overnight trade after U.S. Treasury yields rose on expectations the Federal Reserve would persist with its rate hikes this year. The dollar index, a measure of the currency against a basket of six rivals, edged 0.05% higher at 94.707 this morning compared to the previous day.

A jump in benchmark 10-year U.S. Treasury yields to a five-week high had provided support to the dollar in U.S. trade yesterday. The surge in yields came despite criticism from President Donald Trump about the impact of the strength of the greenback and Federal Reserve interest rate rises on the economy. “The U.S. economy is in a very healthy state overall. It is unimaginable the Federal Reserve would stop raising interest rates," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities.

Currency summary:

EUR/USD is likely to find support at 1.1575 levels and currently trading at 1.1693 levels. The pair has made session high at 1.1722 and hit lows at 1.1680 levels. The euro declined against dollar yesterday as greenback rebounded on bets that Federal Reserve likely to continue raising interest rates despite criticism from President Donald Trump. A White House official told CNBC on Friday that Trump is concerned the U.S. central bank will raise rates two more times this year. Trump had earlier questioned the Fed's expected pace of hikes in posts on Twitter, saying it takes away from the U.S.' "big competitive edge" and could hurt the its’ economy. The Fed is seen as likely to raise rates for the third time this year in September and could be more compelled to continue rate hikes to show its independence as a result of the criticism. The disparity in interest rates between the U.S. and other major economies has been a primary driver of the stronger dollar this year. The dollar index, a measure of the currency against a basket of six rivals, was up 0.22%. This week’s economic focus will be Friday’s U.S. gross domestic product reading for the second quarter, which will be evaluated for indications on how last year’s tax overhaul and recent trade tariffs are influencing growth.

Our Range for the Day :      13.40    -   13.58