Daily Commentary - 26 July 2017

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

- USD / ZAR 13.0605 - EUR / ZAR 15.1720 - GBP / ZAR 16.9903 -

Economic Events:

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:

The rand was rather quiet yesterday but did move mostly in one direction losing ground as the day pushed along. We opening around the 12.9650 level and had tested 12.9300 in the early hours of Asian trade and then slowly worked our way through 13.00 but at no point gained any momentum as we tested 13.0400/13.0450 and then remained at this level for the entire afternoon, closing in New York a cent or two lower at around 13.0800.

Having a quiet day was pretty much on the cards and to see a little bit of selling back out of position wasn’t too much of a surprise either. Nothing really happened over Monday or yesterday to cause much market movement ,however today might be a different story all together.

A big week for key market moving data and everything was always lined up to start “TODAY” with tonight being a FOMC Meeting and with today also seeing UK GDP data, which is also likely to cause its’ fair share of activity in the GBP/USD and GBP/ZAR pricing.

The FED is likely to leave policy rates range unchanged at 1.00%, however the market focus could again centre on the language in the statement. (This is a mini-meeting and therefore there will be no accompanying press conference). Clarity is needed on several residual issues, including the recent disappointing inflation prints and balance sheet adjustment plans. Chair Yellen’s testimony to the House Financial Services Committee and Senate Banking Committee on 12th/ 13th July forms the latest template for assessing the July FOMC statement. The most recent soft CPI print is unlikely to add confidence to the view that low inflation is being driven by “unusual” factors. We expect a reiteration that inflation will continue to be “carefully monitored”.   Several FOMC members have already intimated that balance sheet adjustments could start “relatively soon”. The July meeting could be another opportunity to hint at a calendar reference, which we think will point to the September FOMC meeting. This would leave room for one more policy rate hike at the December FOMC meeting if the mix of growth, inflation and financial conditions data indicate that a relatively healthy expansion is continuing. (S.C.B., Jhb).

The dollar has been under continued pressure but momentum may be waning for EUR/USD the RSI’s, momentum seems to be overdone and a retracement below 1.1600 will not be improbable.

The Rand is slowly creeping higher, stressing the core short USD view. Comments from PIC yesterday that further downgrades are likely and will put pressure on interest rates. The bonds did not like these comments and we saw the curve steepen and the rand giving up ground , “in the event of further downgrades resulting in index exclusion, bond yields will spike to around 125 basis points in the short term and normalise at around 65 to 85 basis points higher.”   We need a market close above 13.14000 for the outlook to move the ZAR to bearish and USD  bullish.

Tomorrow sees local PPI data and then on Friday we have the U.S. GDP figures and hence expect the remainder  of the week to be a lot more volatile that what we’ve seen thus far, but we certainly don’t wish to call a direction, not until after tonight ,when Janet Yellen’s  “language in the statement” has been fully dissected by the market tomorrow.

Our Range for the Day :  R 12.9800   - R 13.1400