Daily Commentary -26 July 2018 | Merchant West

Daily Commentary -26 July 2018

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

USD / ZAR 13.1474 - EUR / ZAR 15.4314 - GBP / ZAR 17.3599 -

Economic Events:

26 July: SA PPI - EC ECB Main Refinancing Rate

27 July : US GDP ;University of Michigan Sentiment

Market Commentary:

Local front:

The South African rand registered further gains across the board against the majors, still glowing in the aftermath of China’s investment commitment announcements. Positive developments from the BRICS summit and a softening dollar, amid abating trade wars as the US & EU agreed to end tariff conflicts also lending support to the beloved currency. The local unit closed the session at R13.1075/$, having tested a low of R13.10/$ in late trade, levels last seen in March. We look to the BRICS summit for waves that may propel further ZAR strengths given returning risk-on sentiment (Absa)

Trade war escalation to negatively impact SA's GDP growth - Fitch

The impact of the escalating global trade war is likely to shave 0.1% off South Africa's gross domestic product (GDP) baseline forecast in 2019 and 0.2% in 2020, according to Fitch Ratings' June 2018 "Global Economic Outlook" baseline forecast. Fitch forecast that the escalation in the trade war is likely to reduce the world GDP by 0.4% in 2019 and by 0.3% in 2020.  "An escalation of global trade tensions that results in new tariffs on $2trn in global trade flows would reduce world growth by 0.4% in 2019, to 2.8% from 3.2%," the Fitch Ratings said in a statement on Wednesday.

The US, Canada and Mexico would be the most affected countries. Fitch expects China would be less severely impacted, with GDP growth around 0.3% below the baseline forecast. Fitch points out that China would only be affected directly by US protectionist measures, whereas the US would be imposing tariffs on a large proportion of its imports, while being hit simultaneously by retaliatory measures from four countries or trading blocs. "The imposition of further tariff measures currently being considered by the US administration and commensurate retaliatory tariffs on US goods by the EU, China, Canada and Mexico would mark a significant escalation from tariff measures imposed to date," according to Fitch.

"The tariffs would initially feed through to higher import prices, raising firms' costs and reducing real wages. Business confidence and equity prices would also be dampened, further weighing on business investment and reducing consumption through a wealth effect." Net commodity exporters would be more severely hit, as slower world growth would push oil and hard commodity prices down. On the other hand, for some net commodity importers, the benefits from lower hard commodity prices would more than offset the impact of lower world growth (Fin24)

International currency front:

The dollar slipped on Thursday and the euro edged higher, as immediate concerns about global trade tensions ebbed after the United States and the European Union agreed to begin talks to lower tariffs. Following talks on Wednesday with European Commission President Jean-Claude Juncker, U.S. President Donald Trump said they agreed to "work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods." The euro was up 0.1 percent trading at 1.1738 against the greenback, extending its rise after gaining 0.4 percent the previous day.

Early on Wednesday, before the Trump-Juncker talks, the single currency slipped to a low of $1.1664 on media reports that Trump was considering imposing a 25 percent tariff on foreign-made cars. But it bounced back on comments of the two leaders that showed desire to find solutions to trade conflicts between the U.S. and European Union. Extending overnight losses, the dollar index against a basket of six major currencies was down 0.25 percent at 94.134 after brushing 94.087, its lowest since July 10.The dollar's retreat was limited, however, as long-term Treasury yields climbed after the U.S.-E.U. trade news improved investor risk appetites and lessened demand for government bonds. “There are various forces at work. The dollar had been bought as a safe-haven during 'risk off' when trade tensions mounted, and now it's giving back some gains with the U.S.-E.U. headlines generating 'risk on," said Koji Fukaya, president of FPG Securities in Tokyo (Reuters)

Our Range for the day:  R13.0000 – R13.2500