DAILY MARKET UPDATE - 01 AUGUST 2019

markets commentary

Merchant West Capital Markets

USD/ZAR 14.4906 EUR/ZAR 15.9948 | GBP/ZAR 17.5546

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Market Data:

29 July - EC: Economic Confidence | SA: South Africa Unemployment | South Africa Budget | US: Personal Spending

30 July - No meaningful data

31 July - US: MBA Mortgage Applications | SA: Trade Balance Rand | Trade Balance Rand | US: FOMC Rate Decision (Lower Bound)

01 Aug - EC: Markit Eurozone Manufacturing PMI | UK: Markit | PMI Manufacturing: Bank of England Bank Rate | SA: Absa Manufacturing PMI  

02 Aug - US: Change in Nonfarm Payrolls | Unemployment Rate | Trade Balance

Market Commentary:

Aug 1 (Reuters) - South Africa’s rand retreated early on Thursday along with other emerging markets currencies, a day after the U.S. Federal Reserve cut lending rates but ruled out an extended cutting cycle. At 0845, the rand was 0.4% weaker at 14.3975 per dollar, its weakest since June 21, compared to an overnight close of 14.3400. The S.A Trade balance came in higher at R4.4bn in June vs R1.7bn in May. Exports fell by 3.2% m/m in June coming in at R108.2bn in June and imports also fell 5.8%n/n to R103.8bn. Bloomberg consensus for July PMI today see the index up to 46.5pts from 46.2 pts in June where it benefited from increased business activity, new sales orders and inventories. The rand is likely to remain under sustained pressure, with local factors also weighing on it. Bonds also weakened, with the yield on the benchmark 10-year government issue,  climbing 7 basis points to 8.395%, its highest level in nine weeks.

In U.S markets - The dollar rose to a two-year peak against the euro and jumped to a two-month high versus the yen on Thursday as U.S. Federal Reserve Chairman Jerome Powell ruled out a lengthy easing cycle after delivering the first rate cut since the financial crisis. In a widely expected move, the U.S. central bank cut rates by 25 basis points to shore up the economy against risks including trade friction. While financial markets had widely expected the Fed to reduce its key overnight lending rate by 25 basis points to a target range of 2.00% to 2.25%, many traders had looked for clearer confirmation of more rate cuts from Powell. At a press conference after the Fed’s decision, Powell said “it’s not the beginning of a long series of rate cuts.” At the same time, he said, “I didn’t say it’s just one rate cut.” Traders still see one more rate cut this year. Powell’s remarks, however, slashed expectations the Fed is prepared to lower rates well into next year. The comments by Powell were not particularly dovish, so this is confirmation that this is a small insurance cut. This outcome limits the dollar’s downside from here. Rate cuts will be on the small side, but this still strengthens the case for a prolonged U.S. economic expansion, which is positive for the dollar long term. The dollar index against a basket of six major currencies rose 0.3% to a two-year high of 98.932. A day prior to the Fed’s meeting, traders had forecast a 35% chance of three cuts by the end of the year. On Wednesday afternoon that figure had fallen to 12%, according to CME Group’s Fed Watch tool.

In European markets, the euro fell to fell to $1.1034, the lowest since May 16, 2017, before paring losses to trade down 0.2% at $1.1045. Sterling skidded against the dollar to the lowest in more than two years on the growing risk of a no-deal Brexit, but the focus will shift to a Bank of England meeting later on Thursday. Economists polled by Reuters are almost certain that the BoE’s Monetary Policy Committee will vote 9-0 to keep rates on hold at 0.75%. but it is less clear how Governor Mark Carney will tackle the challenge posed by the prospect of Britain leaving the European Union without provisional trading agreements. If the dollar remains supreme in G10 currencies, then this is trouble for sterling. Sterling was down 0.3% at $1.2125, after earlier hitting $1.2101, the lowest since January 2017.

Trading range; 14.25-14.55