Daily Commentary - 27 June 2017

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

- USD / ZAR 12.8750 - EUR / ZAR 14.4872 - GBP / ZAR 16.4133 -

Economic Events:

27-June: US Conf. board Consumer Confidence

28-June: US Advanced Goods Trade Balance ;Pending Home Sales

29-June: EZ Economic Confidence  - SA PPI - US GDP; Jobless Claims

30-June: UK GDP - SA Trade Balance -US University of Michigan Sentiment

Market Commentary:

South Africa's rand gained yesterday for a third straight session as fading expectations that the U.S. Federal Reserve will hike interest rates again this year kept investors keen on emerging market currencies. On the bourse, the benchmark Top-40 index fell 0.54% to 45,113 points, while the All-Share index was down 0.42% to 51,288 points. At 16h30 the rand traded 0.7% firmer at 12.8350 per dollar, and later during the N.Y. trading sessions we touch 12.8200 before stalling as traders held off on large bets ahead of a speech by U.S. central bank chair Janet Yellen. With no major local data releases or political developments the rand looked to overseas markets for direction and found it in continued demand for high-yielding EM assets driven by further signs of subdued economic growth in the United States. "Markets globally are fairly strong so there's a risk-on environment and whenever that happens you often see a stronger dollar and you'll see people get out of safe haven assets such as gold," said North Shore Capital fund manager Mark Loubser.

Peter Attard Montalto, emerging markets economist at Japanese bank Nomura, in an investor notice.

Until South Africa exits the World Government Bond Index or there is another external shock, the rand is expected to trade at around R14/$ towards the end of 2017. This is somewhat higher than Nomura’s previous forecast of R15.50/$ in April when the bank predicted the currency would trade around R15.50/$ towards year-end. Montalto is of the view that there is a strong “asymmetry” in the market, which currently hangs on to every possible positive event as a turning juncture, which results in the rand trading better against the dollar than expected. “We still fundamentally disagree with this notion (of market optimism) as we expect the status quo to continue through the ANC elective conference in December almost regardless of who wins, ”Montalto says, adding that it is likely that Nkosazana Dlamini-Zuma would become the next ANC-leader. “Clearly there are other scenarios (such as a win by Deputy President Cyril Ramaphosa), but we don’t see it as likely.”

Montalto is of the view that the market will finally see the very real threats to South Africa’s economy in the growing political noise in favour of a win for Dlamini-Zuma at the ANC’s December elective conference, another GDP growth shock announcement for the second quarter of 2017 (due in September), as well as debates on the independence of the South African Reserve Bank (SARB) and land reform. “The market habit of looking at everything as an optimistic turning point we think can only last until a further downgrade comes and then a Team NDZ (Dlamini-Zuma) victory at the end of the year.” Nomura is concerned about the independence of the SARB. This follows after  Public Protector Busisiwe Mkhwebane called on Parliament to change the Constitution to improve the “socio-economic conditions of the citizens of the republic”, by removing SARB’s mandate to protect the value of the rand. “We still expect the current leadership of the SARB to fight a fierce battle to protect its institutional integrity,” Montalto says. “The question there is what lies beyond the current terms of its leadership after the second half of 2019.”

Furthermore he believes in the event of South Africa exiting the WGBI and another possible credit ratings downgrade after the mini budget in October could lead to an outflow of between $8bn to $9bn and more rand weakness. “A more disorderly market reaction to the Fed (Federal Reserve) balance sheet roll-off in September could exacerbate rand weakness in the fourth quarter,” Montalto says, “though we would expect any larger global reaction to result in caution by the Fed and so weakness could be short-lived. ”Conversely, a win by (current Deputy President) Cyril Ramaphosa at the ANC’s elective conference in December could see the rand break through the R12/$-level. Montalto, however, points out that a Ramaphosa-presidency won’t result in significant reform and economic growth. (NOTE :-  Although we don’t necessarily support Montalto view, felt it useful to include it in the Brief).

International front:

The dollar is standing tall this morning, pushing to a one-month high against the yen as investors waited to see if Federal Reserve Chair Janet Yellen would stick to her positive economic outlook at an event later in the global session. The Fed chair is scheduled to take part in a discussion on global economic issues at London's Royal Academy, and is seen likely to stick to her positive views on the U.S. economy despite a recent batch of weak U.S. economic data, supporting the Fed's forecast of raising interest rates once more this year. "Hedge funds are already selling yen this week, and positive comments from Yellen could give them an excuse to sell even more," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

The U.S. dollar hit a more than one-week low against the euro yesterday after weaker-than-expected economic data fuelled doubts about the Federal Reserve's interest rate hike timeline, while caution ahead of speeches from central bank officials limited the move. The Commerce Department said non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.2% in May, the largest decline since December. The durable goods data "is certainly is a small reminder of other pieces of more important data that haven’t been particularly strong," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. "The dollar has lost a bit of its appeal because of the fact that many market participants think that the Fed is less likely to raise rates."  (Reuters)

Our Range for the Day  :-   12.75    -     13.00