Weekly market brief - 21 July 2017

Currency Outlook

  • Interest rates and inflation targeting are currently key currency drivers globally.
  • The SARB’s rate cut on Thursday caught the market off-guard and leaves the rand even more vulnerable to external developments. South Africa’s policy rate is now the lowest among peers (Brazil, Mexico, Russia, Turkey).
  • There is currently uncertainty around the rand’s direction and near term the rand is expected to trade within the R12.85 – R13.20 range against the dollar, while the medium-term outlook is as wide as R12.50 – 13.50.

Local Data

  • Consumer price inflation increased 5.1% y/y in June 2017, down from 5.4% in May 2017 and lower than expectations of 5.1%.
  • Retail sales rose by 1.7% y/y in May, beating market expectations, after increasing by a revised 2% in April.

Interest Rate Outlook

  • The SARB cut the repo rate by 25 basis points on Thursday. Governor Lesetja Kganyago cited weak growth and easing inflation as key factors behind the decision and denied the bank was affected by recent political attacks against its mandate to contain inflation and protect the currency.
  • Future rate decisions will continue to be based on inflation, growth and local politics.

International News

  • US consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation and soft domestic demand that has reduced expectations of a third interest rate increase from the Federal Reserve this year.
  • US homebuilding rebounded more than expected in June after declining for three straight months, but construction activity remains constrained by rising lumber prices and labour and land shortages.

Precious Metals

  • Gold prices continued to gain following the release of weak US inflation data last week Friday, which reaffirmed doubts the US Fed would have another rate hike this year. The metal jumped to $1 232.76/oz after the data and this week reached a high of $1 247.48/oz on continued dollar weakness.
  • The net futures position in gold fell by 3.33moz to 7.39moz in the week leading to July 11th, the lowest since February last year.

Base Metals

  • Positive data from China helped 3m copper rise to $ 6022/t on Monday.

Oil

  • Brent rose to a six-week high of $50.19/bbl on Thursday after a US report showed a bigger weekly draw than forecast in crude and gasoline stocks along with a surprise drop in distillate inventories.
  • The Energy Information Administration (EIA) said US crude stocks fell 4.7 million barrels during the week ended July 14, exceeding estimates for a 3.2 million draw in a Reuters poll.