Daily Commentary - 27 July 2018

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

USD / ZAR 13.2010 - EUR / ZAR 15.3733 - GBP / ZAR 17.3107 -

Economic Events:

27 July : US GDP ;University of Michigan Sentiment

Market Commentary:

Local front:

South Africa's rand rose early on Thursday against a weaker dollar, with focus on the final day of the BRICS summit. At 08h47 the rand was 0.32 percent stronger at 13.2050 to the dollar, compared with its New York close of 13.2475. The dollar trimmed some losses against the yen on Friday after the Bank of Japan conducted a special government bond-buying operation to arrest a rise in long-term yields but still remained slightly weaker down 0.1 percent. "BRICS remains the key focus for the rand, along with US GDP out later today," Nedbank analysts said in a morning note. Analysts expect the rand to trade in the range of 13.1000 to 13.4000 to the dollar.

Leaders of the BRICS bloc of emerging economies, meeting in the wake of tariff threats by U.S. President Donald Trump, signed a declaration supporting an open and inclusive multilateral trading system under World Trade Organisation rules at their summit in South Africa on Thursday. Brazil, Russia, India, China and South Africa agreed at the three-day meeting to fight unilateralism and protectionism. “We reaffirm the centrality of the rules-based, transparent, non-discriminatory, open and inclusive multilateral trading system, as embodied in the World Trade Organisation, that promotes a predictable trade environment and the centrality of the WTO," the declaration signed by the five leaders said.

The leaders said: "We recognise that the multilateral trading system is facing unprecedented challenges. We underscore the importance of an open world economy. “They called on all WTO members to abide by WTO rules. The meeting of BRICS leaders is the first since the U.S. administration launched a push to rebalance trade multilateralism that Trump has deemed unfair - relationships that the United States once championed. Earlier on Thursday, Chinese President Xi Jinping called for a concerted effort by global institutions such as the United Nations and the WTO to fight unilateralism and protectionism. Xi, who leads the world's second-biggest economy, also called for dialogue to settle disputes on global trade, underlining remarks he made at the opening of the summit the previous day.

International data front:

New orders for key U.S.-made capital goods increased more than expected in June and shipments surged, pointing to solid growth in business spending on equipment in the second quarter. Expectations of robust economic growth in the April-June period were, however, tempered somewhat by other data on Thursday showing a widening in the goods trade deficit last month and no change in retail and wholesale inventories. “The U.S. economy surely strengthened in the second quarter, but likely ended the quarter on a softer touch, suggesting some slowing in the third quarter," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose 0.6 percent last month after an upwardly revised 0.7 percent increase in May. Orders increased broadly last month. Economists polled by Reuters had forecast the so-called core capital goods orders rising 0.4 percent in June after a previously reported 0.3 percent gain in May. Core capital goods orders increased 6.8 percent on a year-on-year basis. Shipments of core capital goods jumped 1.0 percent last month after an unrevised 0.2 percent gain in May. Core capital goods shipments are used to calculate equipment spending in the government's gross domestic product measurement.

International currency front:

The dollar steadied on Friday following a rally against its peers overnight, as investors awaited U.S. economic growth data, which could give a fresh catalyst for direction amid a wider focus on global monetary policy and bond yield direction. The dollar index, which measures the greenback's strength against a basket of six major currencies, stood little changed at 94.719. It had risen 0.4 percent overnight to pull away from a two-week trough of 94.084 as the euro slid sharply after the European Central Bank kept to its planned timetable to move away from its accommodative monetary policy. While the euro's downturn provided the dollar with a significant lift, the U.S. currency enjoyed support from other quarters as well.

"The dollar is higher across the board and this reflects the lift it is enjoying from fundamental factors, notably higher U.S. yields and Wall Street shares amid improving risk appetite," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “The dollar will remain caught between the lift from such fundamental factors and downward pressure from political factors, such as President Trump's attempts to keep dollar strength in check." The euro was virtually trading flat at 1.1643 against the greenback.

The single currency had sunk more than 0.7 percent on Thursday following the ECB's policy meeting. Taking the wind out of euro bulls' sails, the ECB said it would stay on course to end its 2.6 trillion euro stimulus programme this year and keep rates at a record low level through the summer of 2019.

Our Range for the day:  R13.1000 – R13.3500