Daily Commentary - 31 July 2017

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

- USD / ZAR 13.0534 - EUR / ZAR 15.3076 - GBP / ZAR 17.1203 -

Economic Events:

31-July: EC CPI - SA Trade Balance

01-August: EC Manufacturing PMI ; GDP- SA Manufacturing PMI - US Manufacturing PMI

02-August: EC PPI

03-August: EC Retail Sales - US ISM Non-Manf. Composite

04-August: US Change in Nonfarm Payrolls ; Unemployment Rate ; Trade Balance

Market Commentary:

The rand weakened out on Friday, faltering in the face of technical barriers and political worries after an executive at Eskom was suspended pending an investigation into graft allegations.  This morning it is flat ahead of June trade data and a press release by the African National Congress later today.  The ANC held it’s lekgotla over the weekend and there has been very little news on this in the papers.  June M3 was published at 5.96% versus 5.98% for May.  Private Sector Credit Extension came in at 6.16% for June versus 6.69% for May.  For most investors, the trade figures due this afternoon, hold an obvious link to the currency by virtue of the cross-border flow that they reflect.  On the money supply and credit extension data, there is also a very powerful link that precedes that of the trade account, but investors are less aware of the significance to the currency.  Not only is the money supply data a good barometer for the business cycle and a proxy for the level of credit driven consumption and corporate borrowing for investment, but it also reflects the monetary space the currency has to weaken.

One of the principle facilitators of currency weakness is very strong growth in money supply.  If money supply growth is proceeding at a very gradual pace, the probability is higher that the currency will prove a lot more resilient to bad news.  For the SA economy, this is very applicable at the moment, with the credit cycle tight and growth showing signs of slowing even further.  Money supply growth often offers perspective to the trade figures precisely because of the link between private sector credit extension, consumption and investment.  The weaker the consumptive and investment cycle, the weaker the demand for imports.  Essentially, the softer the growth in money supply, the higher the probability of a balanced environment on the trade account.  SA tends to live within its means when expenditure and consumption is curtailed and this has helped improve the overall resilience of the ZAR through the course of the past 18 months.  According to the ETM ZAR Resilience Indicator, ZAR resilience now stands at the highest levels since late 2011.

On Friday US 2Q17 GDP improved to 2.6% annualised from 1.4% in the first quarter.  This was in line with consensus expectation and is obviously indicative of an economy which continues to grow.  Labour figures expected out on Friday is expected to support this.  A point to note is that the US has entered its nineth year of economic expansion in steady but unspectacular fashion and shows little sign of abating.  This places emerging markets in an interesting position of good growth and low inflation, which should be supportive for our bonds given their superior yield.  These inflows will also have a knock-on effect for the currency.

China’s official factory gauge dialled back a notch in July as a push by authorities to curb financial risks spreads.  The manufacturing purchasing managers index slowed to 51.4 in July, the non-manufacturing PMI was 54.5.  Japan's factory output rebounded in June from a decline in May as production of cars and industrial chemicals increased, suggesting economic expansion may be on a more stable footing.

The International Monetary Fund warned that Britain needs to save more, train up its workers and become a more competitive economy to try to bring down its very large current account deficit.

Expected range for today : 12.80  –  13.10