Daily Commentary - 29 August 2017

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

- USD / ZAR 13.0872 - EUR / ZAR 15.6983 - GBP / ZAR 16.9530 -

Economic Events:

29-August: US Consumer Confidence

30-August: EC Economic Confidence - US ADP Employment Change ; GDP

31-August: EC CPI Estimate - SA PPI ; Trade Balance - US Initial Jobless Claims ;Pending Home Sales

01-Sep: EC Manufacturing PMI - SA Manufacturing PMI -US Change in Nonfarm Payrolls;ISM Manufacturing ; University of Michigan Confidence

Market Commentary:

South Africa's rand weakened on Monday and was largely range-bound in the absence of market-moving data expected later in the week and subdued trade as UK banks were closed for a holiday. Stocks dipped led lower by construction company Basil Read which swung to a half-year loss. At 17h18, the rand traded at 13.0375 versus the dollar, 0.29 percent lower than its New York close on Friday, trading within a 13.04 to 13.08 range. "The fact that they are off today means very much a range trading market for us," said currency trader at Rand Merchant Bank Jim Bryson, referring to the UK banking holiday. The rand will look for direction from economic data later in the week in the form of July money supply and private sector credit data on Wednesday, as well as producer price inflation figures and trade numbers due on Thursday. In fixed income, government bonds weakened slightly with the yield for the benchmark instrument due in 2026 R186 up 1 basis points to 8.580 percent.

Given that a war between Japan/Korea/US and North Korea would be devastating — and generate R2.00+ big figure rise in USD/ZAR — one can understand the market’s nervousness. However, the problem with the catastrophe trade is that there is only a very small chance of a massive market event and a near certain chance that nothing will happen. Betting on the catastrophe therefore is almost always going to generate a loss, which is to say that, as with all the previous missile launches, expect risk aversion to die away rapidly, and for risk assets to recoup their losses - Rand Merchant Bank (RMB)

On the International front:

 

The dollar hit a four-month low against the yen on Tuesday after North Korea fired a missile that passed over northern Japan, the latest act of provocation by Pyongyang that has ramped up global tensions. The dollar was down 0.4 percent at 108.81 JPY, having slid to as low as 108.33 yen in early Asian trade on Tuesday, its lowest level since mid-April. A risk-averse mood prevailed in the region following the missile launch, with Japan's Nikkei stock index falling to its lowest level in nearly four months. North Korea fired a missile early on Tuesday that flew over Japan and landed in waters off Hokkaido, in a sharp escalation of tensions on the Korean peninsula. "Based on past patterns in which the yen has gained on such incidences, speculators reacted immediately to the North Korean missile headlines, taking dollar/yen to the intraday lows," said Mitsuo Imaizumi, chief FX strategist at Daiwa Securities.

The United States, Japan and South Korea asked for a United Nations Security Council meeting to discuss the test, diplomats said. A meeting of the 15-member Security Council would be held later on Tuesday, they said. The risk of further falls in the dollar against the yen can't be ruled out given the simmering geopolitical tensions, said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore. "It doesn't look like the situation is settling down, so I think you need to stay on guard," Ino said. "It's very hard to get a good read on what might happen after this," he added.

The dollar was already on the defensive, particularly against the euro, after Federal Reserve Chair Janet Yellen did not mention monetary policy at a central bankers' summit in Jackson Hole last week, and as European Central Bank President Mario Draghi's held back from talking down the euro at the same meeting. The dollar had also weakened after Tropical Storm Harvey paralysed Houston, Texas, and many oil refineries in the U.S. Gulf Coast, spurring worries about the storm's potential impact on the U.S. economy. The euro was down 0.1 percent at 1.1969 against the greenback. Earlier on Tuesday the euro rose to $1.1986, its highest since January 2015.

Our range for the day: R12.90 – R13.20