Daily Commentary - 28 June 2018 | Merchant West

Daily Commentary - 28 June 2018

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

USD / ZAR 13.8392 - EUR / ZAR 15.9949 - GBP / ZAR 18.1128 -

Economic Events:

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 contentious issue of land expropriation without compensation has once again moved into the spotlight with the public consultation process kicking off in the Northern Cape yesterday. This could well be a very long process, but could be politically dangerous for the current government, especially heading into the 2019 elections. Moody’s Investors Service raised concerns about these political risks in SA as well as the country’s widening current account deficit, slow growth and growing inflation pressure. All these make it one of the more vulnerable emerging market units.

Globally, risk-off trade conditions is also putting emerging markets currencies under pressure. On Wednesday it was reported that President Donald Trump had instructed the U.S Treasury Department to draft curbs that would block companies with at least 25 percent Chinese ownership from buying U.S tech firms. This came after Chinese investments threatened to acquire U.S technologies instead of imposing China specific restrictions. Harley Davidson said on Tuesday that it wanted to move its production away from the US due to tariffs that Trump wants to impose. Trump retaliated saying he would impose taxes on Harley Davidson like never before, should they produce motorcycles outside US borders.

In the light of all of the above, the rand weakened yesterday to its lowest level since 27 November. As RMB economist, Isaah Mhlanga said, trade wars are going to be painful and as long as they remain unresolved or escalate, there will be no winners, only losers, all around.

Sterling fell by its biggest daily drop in two weeks yesterday, as imminent Brexit talks and doubts of interest rate hikes weighed on the unit. Mark Carney, the Bank of England Governor, said yesterday that banks were fully prepared for a disorderly Brexit. He however shed little light on whether interest rates will rise in August when it has its next policy meeting. Markets are expecting a fifty  percent probability of a 25 basis point rise in August and a ninety  percent probability of an increase by the end of 2018. The EU summit this week has also kept Sterling traders cautious.

The EURO is also looking rather fragile as the 1.1500 level becomes key and a break below will result in more EURO weakening. Uncertainty around Germany / Europe continuing migration resulting in geopolitical tensions, is also weighing on the unit.

Expected range : 13.80 – 14.05