DAILY MARKET UPDATE - 03 February 2020 | Merchant West

DAILY MARKET UPDATE - 03 February 2020

treasury outsourcing

Merchant West Capital Markets

USD/ZAR 14.975 | EUR/ZAR 16.5714 | GBP/ZAR 19.7107

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email: treasury@merchantwest.co.za

Produced for Merchant West by ETM Analytics

Market Commentary:

The rand depreciated 1.30% against a broadly-weaker USD on Friday, as South Africa’s idiosyncratic issues such as loadshedding and concerns over weak economic activity exacerbated already-weak market sentiment due to the coronavirus epidemic in China. This added to an already-dismal week for the local unit, in which it lost 4.40% of its value against the dollar to close beyond the 15.00/$ handle for the first time since October last year. Pulling back the lens slightly further, and the ZAR traded down 7.50% throughout January to more than retrace its strong December advance.

This was the rand’s biggest monthly depreciation since the emerging market crisis of August 2018, reflecting a tetchy external trading environment as well as growing concerns over South Africa’s economic prospects ahead of this month’s budget speech and subsequent Moody’s credit rating review. These concerns were also evident in the options market, where the cost to hedge against ZAR volatility for the next two months surged to its highest level since October last year. 

Early trade today has seen the ZAR recover some of last week’s losses despite still-weak market sentiment, however, as traders looked to book profits at levels where the local unit is seen to be moving towards oversold territory. The market also appears to be weighing its concerns over the spread of the deadly coronavirus against news that China’s central bank unexpectedly lowered the interest rates on reverse repurchase agreements earlier today, which should relieve some of the pressure exerted on the world’s second-biggest economy from the coronavirus outbreak and add some extra liquidity to global financial markets.  

Regarding the domestic data card, the ABSA manufacturing Purchasing Manager's Index (PMI) and NAAMSA vehicle sales stats will today provide the market with fresh insights into manufacturing sector sentiment and demand in South Africa. These releases will be accompanied by manufacturing PMIs from the world’s developed markets, which could add some impetus to global financial flows on a day where the spread of the coronavirus will likely draw most of the focus once again. Although market sentiment and risk appetite remain weak at present, technical analysis suggests that the scope for more significant ZAR depreciation in the session ahead appears limited. 

Expected range for the day: 14.85 - 15.05