Daily Commentary - 29 June 2018

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

USD / ZAR 13.7400- EUR / ZAR 15.9727 - GBP / ZAR 18.0184 -

Economic Events:

29 June: UK GDP - EC CPI Data - SA Trade Balance and SA Budget - US University of Michigan Sentiment

Market Commentary:

The rand appears to have surrendered most of its earlier gains, made on the back of optimism induced by the newly elected national leadership. The euphoria has since worn off and the rand is back to its old ways. On an international front, the threat of a global trade war is becoming increasingly persistent and has forced markets to a heightened state of risk aversion. Emerging markets currencies are bearing the brunt of these trade tensions, with the rand emerging as the biggest loser. Although the rand`s direction has mostly been determined by international factors, local conditions have also caught the attention of Moody`s investor services and could contribute to further downward pressure on the domestic currency. Moody`s have warned that the weak economic figures, land expropriation and the state of parastatals are clouding the country`s outlook. “What compounded the weakness in the rand was the rejection of the 5% wage offer by Eskom by three unions and month-end, quarter-end and half-year momentum-driven US dollar-buying,” Rand Merchant Bank analyst Isaah Mhlanga wrote in a note (source: Moneyweb). The rand is currently hovering near a seven-month low and the outlook does not seem to be improving. The rand is expected to remain highly volatile and susceptible to headline risk.

In the US market, the dollar index which tracks the greenback against a basket of six major currencies, traded down 0.5%. “The dollar’s gains partly stemmed from the prospects of rising U.S. interest rates on the back of solid expansion in the U.S. economy” (source: Reuters). The dollar has been lifted by repatriations as markets wait for further certainty on the protectionist policies being implemented by the US. Up to now, the trade conflicts have mostly weighed on emerging markets, but a spill over into developed economies is inevitable. The evolution of these trade disputes will be a key driver of the direction in the dollar and the euro in the short-term, and will also have a significant influence on other currencies.

In the European market, the euro has been held back by a more dovish stance from the European Central Bank and political uncertainty in its member countries. However, the euro recently started gaining following a migration agreement reached by leaders of the European Union. “If unresolved, the row would have sent a damaging signal about EU unity at a time when the bloc is being assailed by U.S. President Donald Trump on trade and struggling to deal with the legacy of its 2015 crisis, which saw more than one million refugees and migrants enter Europe” (source: Reuters). In the UK market,  the pound has lost significant ground as Brexit negotiations and policy uncertainty continues to weigh. “The pound fell to its lowest since early November on Thursday as investors fretted that a European Union summit would underline how there has been no meaningful progress for months in negotiations on a Brexit deal. This lack of progress, combined with a series of corporate warnings this week about the effect on Britain’s economy if a deal is not agreed soon, has weighed heavily on sterling and lowered expectations of a Bank of England interest rate rise” (source: Reuters).

Our range for the day : R 13.6000- R13.8500