31 Jul 2017

Week Ahead: Trade data likely to confirm subdued domestic demand amid depressed consumer and business confidence

Annabel Bishop

Chief Economist

The rand traded in line with most emerging market currencies this week, guided by the US$ and the US FOMC statement. In particular, the US$ index is trading in the vicinity of its lowest level in over a year which has also seen commodity prices strengthen.

Fig 1 - SA Monetary Police Committee Meeting Dates for 2017

In its July FOMC statement the Fed noted the declines in both core and headline inflation, which continue to run below 2.0%. Markets expect the moderation in inflation could extend for longer than the Fed anticipates. Fed fund futures are presently assigning a 40% probability of one more interest rate hike by December. The Fed also expects to “begin implementing its balance normalization program relatively soon”. Markets are positioned for a very gradual pace of change and liquidity conditions are still favourable. A continuation of this coupled with a sustained lift in global growth and trade could continue to support emerging market portfolio flows.

The rand is expected to trade in a range of R13.55/USD – R12.55/USD, R15.80/EUR - R14.80/EUR and R17.60/GBP - R16.60/GBP.

(RD) The first week of August is set to be a bumper one for economic events. Monetary policy will once again be a dominant theme, in the UK with the MPC decision due on Thursday. After June’s MPC minutes revealed a hawkish slant to the committee and that three members of the committee had voted for a 0.25% hike, markets had priced in a greater chance of a move at August’s meeting. However, data and comments from a number of prominent members on the committee, including the Governor Mark Carney look to have dampened any chance of a rise in UK interest rates next week. Indeed we do not forecast the first rise in UK policy rates until 2019. As well as the actual decision at midday, the BoE will also release its August Inflation report followed by Governor Carney’s press conference at 12:30pm. In addition to the BoE, the Reserve Bank of Australia is also expected to keep its cash rate on hold on Tuesday at 1.50%.

In the US, non-farm payrolls will be the key data release of the week. June’s employment report recorded 222k jobs being added in the month. We suspect that next Friday’s report will again point to a robust pace of jobs growth in July, at 185k, with the unemployment rate edging down from 4.4% to 4.3%. Markets will also be keeping a close eye on the average earnings figures for any further signs that the fall in unemployment is beginning to push up on wage growth.

Aside from the payrolls figures, there are a number of tier 1 releases from the US across next week. Key ones to watch will be both the manufacturing and non-manufacturing ISM surveys for July and the ADP employment survey. Meanwhile the US corporate earnings season continues.

Figure 2: USDZAR

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