Daily Commentary - 31 August 2017

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

- USD / ZAR 13.0032 - EUR / ZAR 14.4683 - GBP / ZAR 16.7848 -

Economic Events:

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 steadied against the dollar early on Thursday ahead of producer price inflation and trade data, as well as an appearance in parliament by President Jacob Zuma. At 08h45, the rand traded at 13.0100 per dollar, unchanged from its overnight close in New York. Zuma will answer questions in parliament from 14h00, his first appearance in the legislature after surviving an attempt to force him from office on Aug. 8. Stocks were set to open flat , with the JSE securities exchange's Top-40 futures index largely unchanged.

There were concerns that higher risk currencies such as the South African rand would come under pressure due to the Jackson Hole meeting, however, it did not materialise. The USD/ZAR pair continues to gain from the continuous risk-on sentiment and, also the USD. On Tuesday, the pair eased below 13. But there are additional stress tests for ZAR this week, noted Commerzbank in a research report. South Africa has a couple of indicators releasing this week, including the PMI on Friday. There are worries that the data might disappoint given the flagging economy. The market concentrates mainly on the budget data as rating agencies have demanded a consolidation of public finances. That task would be easier if the economy could overcome the recession and finally gather momentum, stated Commerzbank. The South African Reserve Bank appears to be confident as regards the expected recovery; however, dampened rate cut expectations. The central bank had cut the key rate by 25 basis points to 6.75 percent in July but it stresses that it still sees the risk of inflation.

“Due to the political risks ZAR also contributes to this dilemma. By year-end we expect ZAR to weaken to levels around 14 in USD-ZAR”, added Commerzbank.

On the International front:

The dollar hit a two-week high versus the yen on Thursday, extending its gains after strong U.S. economic data bolstered expectations for a solid U.S. jobs report later this week. The dollar rose to 110.615 yen at one point, its strongest level since Aug. 16. It last changed hands at 110.52 yen, up 0.3 percent from late U.S. trade on Wednesday. The greenback gained a lift after the U.S. Commerce Department on Wednesday revised up gross domestic product to a 3.0 percent annual rate in the second quarter, the quickest in more than two years. In addition, the ADP National Employment Report showed U.S. private-sector employers hired 237,000 workers in August for the biggest monthly increase in five months, driving expectations for a solid U.S. August non-farm payrolls figure.)

In the wake of such solid economic indicators, market expectations for the chances of a rate hike by the Federal Reserve in December may start to increase and support the dollar, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore. "I think the market is starting to think that eventually the wage growth component is going to start to kick in," Innes said, adding that the dollar may attract demand ahead of the U.S. nonfarm payrolls data due on Friday.

Later on Thursday, the dollar could take its cues from the U.S. core personal consumption expenditures price (PCE) index, the Fed's preferred inflation measure. Core inflation data for the euro zone is also coming up later on Thursday. The euro slipped 0.1 percent to 1.1878 against the greenback, having retreated from a 2-1/2-year high of $1.2070 set on Tuesday. The common currency had risen past the $1.20 threshold after European Central Bank President Mario Draghi made no mention of the euro's strength at the Jackson Hole conference in Wyoming last week. Analysts, however, say market participants remain wary of the risk that ECB policymakers may start expressing concerns about the euro's rise, which can exert disinflationary pressures on the euro zone's economy. "We've got the ECB meeting next week and there's a lot of focus in the market of what the ECB could or could not say about the currency strength," said Peter Dragicevich, G10 FX strategist at Nomura in Singapore.

Our range for the day : R12.92 – R13.10