Daily Commentary - 26 June 2018

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

USD / ZAR 13.5623 - EUR / ZAR 15.8451 - GBP / ZAR 18.0024 -

Economic Events:

26 June: US Conf. Board Consumer Confidence

27 June: EC Money Supply - US MBA Mortgage Applications, Advanced Goods Trade Balance

28 June: GE CPI Data - SA PPI Data - US GDP and Jobless Claims

29 June: UK GDP - EC CPI Data - SA Trade Balance and SA Budget - US University of Michigan Sentiment

Market Commentary:

The absence of negative headlines has allowed the rand to enter the week on a more stable footing. The rand has come under fire in the preceding weeks as the threat of a global trade war, a poor local economic outlook and a general risk-off sentiment raised fears in the market. According to an article published by Bloomberg, the rand’s REER as measured by the Bank for International Settlements is now equal to its 10-year average, meaning it’s neither over- nor undervalued when benchmarked against a basket of other currencies over the long term. The recent depreciation in the local currency has also prompted investors to start pricing in a potential interest rate hike, however a Reuters poll found last week that economists expect the South African Reserve Bank to keep its repo rate unchanged at 6.5 percent until 2020. Given the array of negative economic figures released into the market, international factors still appear to be the main driver of the rand`s direction. How the United States – European Union trade dispute unravels will have a significant impact on emerging market currencies, particularly the rand.

In the US market, the dollar continues to slide as there appears to be no sign of a possible retraction as the trade war progresses. US president Donald Trump has extended his initial tariff imposition on Chinese imports to the Eurozone bloc, clearly signalling their renewed trade stance. The sudden nature and the uncertainty created by these protectionist policies has forced the market to abandon riskier assets until further clarity is provided. The trade tensions also induced a global equity sell-off, which could result in a sustained bearish environment. Contrarily, the recent announcement by the US Federal Reserve that another four interest rate hikes are planned for the coming year has also spurred some dollar optimism. “Hedge funds are loading up on bullish dollar bets at the fastest pace on record, taking the Fed’s recent hawkish signal on interest rates at face value and going long the greenback for the first time in a year” (source: Reuters).

In the European market, the euro is holding onto its gains made on the back of improved economic growth and fading Italian political fears. However, the intensifying trade dispute with the US will likely determine the direction of the common currency. “A senior European Commission official said on Saturday the European Union would respond to any U.S. move to raise tariffs on cars made in the bloc” (source: Reuters). In the UK market, the pound remains relatively stable and has been held afloat by expectations for the Bank of England to adopt a more contractionary monetary policy stance. According to an article published by Reuters, markets are expecting a 50 percent likelihood of the BoE raising interest rates in August by 25 basis points. On the political front, delays in negotiating a favourable Brexit deals continues to weigh on the market.

Our Range for the day: R13.4400 - R13.6500