Daily Commentary - 25 July 2017

Merchant West Business Finance

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

- USD / ZAR 12.9819 - EUR / ZAR 15.1361 - GBP / ZAR 16.9122 -

Economic Events:

25-July: US Consumer Confidence

26-July: UK GDP - US Mortgage Applications  ; New Home Sales

27-July: SA PPI - US  Durable Goods Orders ; Jobless Claims ; Advanced Goods Trade Balance

28-July: EU Economic Confidence - SA Budget - US GDP ;  University Of Michigan Sentiment

Market Commentary:

ZAR

Yesterday, the ZAR further extended gains as political pressures in the US pushed the ailing greenback towards a 13-month low against other major currencies. The Rand traded at 12.9150 against the USD dollar in the morning, starting the day 0.15% firmer, and at 09h00 was at USD/ZAR 12.9200, EUR/ZAR 15.0475 and GBP/ZAR 16.7915.  Less than two weeks ago, favourable emerging market sentiment boosted a rebound from 13.6300 against the US dollar. This week, the market will focus on the US federal reserve`s policy meeting and its decision to unwind the USD 4.2 trillion bond purchase scheme. This strong EUR has also kept its momentum, which could signal some future Rand weakness with the ECB and US federal reserve moving away from accommodative monetary policy after years of quantitative easing and low interest rates. At present, the Rand is largely benefitting from broad US dollar weakness, which creates a favourable exchange-rate environment for importers. On the JSE, stocks opened firmer with the Top-40 index up 0.58% and the All-Share Index up 0.38%. Industrials such as Naspers and Vodacom closed remarkably higher and provided some buoyancy to the market.

USD

Anticipation surrounding the US Federal Reserve policy meeting and imminent earnings results pushed Asian markets into negative territories, and caused the US dollar to extend its’ losses yesterday. The top three indices on the NYSE are also struggling to gain traction as uncertainty surrounding Donald Trump drags on investor sentiment. Facing a probe investigating links between Russian meddling and Trump`s election campaign, and his drive to reform national healthcare in the US has further dampened dollar expectations. "Factoring in the expanding US political sinkhole, which is weighing on broader (dollar) sentiment, it's unlikely the market has run out of steam," Stephen Innes, head of Asia-Pacific trading at OANDA, said in a note. Traders will be keeping an eye on the Fed's latest policy meeting, which ends on Wednesday, hoping for some guidance on its plans for raising interest rates. Expectations for further hikes have been tempered in recent weeks as inflation remains tepid and Trump's woes build up.

EUR

In early trade yesterday the euro bought $1.1670, around two-year highs, with analysts predicting it could break above the $1.1714 mark set in mid-2015. The single currency extended last week's rally against the greenback after European Central Bank boss Mario Draghi said policy makers would address its vast stimulus programme by the autumn, fuelling speculation they would start winding it in. Strategists and technical analysis suggest the currency may extend gains toward that 2015 high. On charts, the medium-term objective is seen at $1.1736 to $1.1806, which is the 38.2% Fibonacci retracement of the 2014 to 2017 selloff and the 200-week moving average. Stop losses are poised above $1.1750, according to a trader in London.

GBP

The IMF revised down its 2017 growth forecast for the UK to 1.7% from 1.8% in 2016, it said in an update of its World Economic Outlook, after predicting an increase to 2% in April. Britain’s growth performance contrasted with many of its European peers such as Germany, France and Spain where growth surpassed expectations, the IMF said. Sterling gained versus most of its Group-of-10 peers, approaching its highest level against the US currency since September. The pound advanced for a second day versus the dollar as investors looked past the International Monetary Fund’s (IMF) decision to downgrade the UK’s growth forecast for this year and focused their attention on the developments surrounding Brexit and the Bank of England’s monetary policy. Tomorrow’s U>K. GBP data is expected to come out at 0.3% vs. last months’ 0.25%, still very subdued and not likely to see much change any time soon.

US Federal Reserve & European Central Bank (Source: Reuters)

The Fed bought U.S. Treasuries and mortgage-backed securities (MBS) for about six years in a program known as "quantitative easing" which kept interest rates at record lows to spur borrowing and economic recovery. But at its June meeting this year, they raised the interest rate to 1% and  also announced a plan to begin by letting $6 billion a month in Treasuries mature without reinvestment and to increase that amount at three month intervals up to $30 billion. Now, the European Central Bank (ECB) also appears likely to decide later this year on when to scale back its monthly bond purchases. When ECB President Mario Draghi first hinted at the prospect last month, world bond yields rose sharply for a while. When Fed policymakers meet on 25th / 26th July they will need to decide a start date for reducing their bond holdings or leave more time to evaluate what Fed Governor Lael Brainard recently cited as a possible "turning point" in global monetary policy that may affect economic growth. The Fed's plan to reduce its portfolio may well push up longer term bond yields, driving up long term borrowing rates for business, and lead to higher mortgage rates for the housing industry.

Our Range for Day :-    12.90     -    13.02