Daily Commentary - 28 June 2017

Contact Merchant West Capital Markets on: (+27 11) 305-9500 or treasury@merchantwest.co.za

- USD / ZAR 13.0330 - EUR / ZAR 14.8364 - GBP / ZAR 16.7153 -

Economic Events:

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 weakened yesterday on poor employment figures. At 17h40, the rand traded at 12.9600 per dollar, 0.75% weaker than its New York close the night before. Employment in South Africa's non-agriculture sector fell by 0.5% to 9.64 million people in the first quarter of 2017, compared with the previous three months. "The employment data is fairly correlated with what we have seen with the rand weakening," said IG South Africa senior market analyst Shaun Murison, but the real problem for the rand came about overnight and had nothing to do with data or any other local developments.

EUR/USD is likely to find support at 1.1234 levels and currently trading at 1.1339 levels. The pair has made session high at 1.1341 and hit lows at 1.1272 levels. Euro rose against the dollar last night as the single currency found buying interest after comments from European Central Bank President Mario Draghi highlighted a recovering economy, testing the 10mth highs. But he did add that any change in the bank's stance should be gradual, as "considerable" monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions. The status of the ECB's bond-buying program has been a key driver of the euro's value in recent weeks. The dollar jumped against the euro earlier this month after the central bank said policymakers had not discussed scaling back its massive bond-buying program.

To add to the fire, U.S. Federal Reserve Chair Janet Yellen was also speaking last night and said that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash. "Would I say there will never, ever be another financial crisis?" Yellen said at a question-and-answer event in London. "You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," she said. Yellen said it would "not be a good thing" if reforms of the financial services industry since the crisis were unwound, and urged those who had helped manage the fallout at the time to be vocal in preventing such a dilution. Yellen declined to comment when asked about her relationship with Trump but said she had a good working relationship with U.S. Treasury Secretary Steve Mnuchin. She also reiterated her view that the U.S. central bank would continue to raise interest rates only gradually. "We think it will be appropriate for the attainment of our goals to raise interest rates very gradually to levels that are likely to remain quite low, although there is uncertainty about this, to remain low by historical standards for a long time," she said. She said the stockpile of bonds the Fed amassed to help the U.S. economy through the crisis would be shrunk "gradually and predictably". Asked about share price valuations by a member of the audience, Yellen said "by standard metrics, some asset valuations look high but there's no certainty about that".

A hawkish Draghi coupled with a dovish Yellen saw a massive exit out of the Dollar into the Euro, but sadly this didn’t seem to be enough from most traders who also choose to off load their long EM Currency positions and move those into Euro’s too.

Stocks on Wall Street finished at session lows after a planned U.S. Senate vote on a healthcare revamp bill was postponed. The delay in the healthcare vote brought back worries about the time table of President Donald Trump's business-friendly agenda. More time spent on healthcare pushes back the discussion on a tax reform eagerly eyed by investors and corporations. “The market likes certainty and now there’s uncertainty," said Peter Costa, president at trading firm Empire Executions Inc. "What is this (health bill) going to look like when this gets out of the next iteration? That uncertainty I think is just having people pause a little bit. I also think that when the market gets to certain levels, any type of uncertainty, especially in anything that has to do with the (Trump) administration, will have an adverse effect”.

We are the wrong side of 13.00 again against the Dollar, but it might just be an overreaction of comment from Draghi that the market still has to fully digest. Still too early to call and EM Markets may still remain under pressure for a short while before the dust can settle.

Our Range for the Day :-    12.92     -  13.13