DAILY MARKET UPDATE - 06 OCTOBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 16.54 | EUR/ZAR 19.4873 | GBP/ZAR 21.4611

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email: treasury@merchantwest.co.za

Produced for Merchant West by ETM Analytics

Market Commentary:

Risk aversion does seem to be subsiding and, along with that, yesterday emerging market currencies rose against the US Dollar, driven mainly by pressure on the greenback. It was a positive day for most developing and developed markets as news showed Trump’s health condition not in dire straits as feared. However, the ZAR lagged behind in the EM basket and ultimately closed flat after experiencing risk-on conditions during the first half of the day. The local unit appreciated to 16.36/$ before pulling back to 16.53/$, slightly weaker than Friday’s close.

In domestic news yesterday, the Standard bank PMI continued to rise off May’s lows, coming in at 49.4 in September. The PMI did surpass expectations for a reading of 46.0 and rose to an 11-month high. The survey showed output and new business fell at a slower pace since lockdown restrictions have eased and future expectations have improved, but with the economy still not at pre-pandemic levels of operational capacity, employment was further reduced. Being below the 50-mark, this signals the private sector is still experiencing contractionary conditions as it has done so since May 2019. This highlights the ongoing structural challenges within the South African economy which have merely been exacerbated by the pandemic. In absence of a political drive to remove these and to reform in order to be more growth conducive, private sector performance will be at risk and potential economic growth supressed.

Having said that, the ZAR’s movements continue to shrug off its fundamentals as it tracks broader EM risk sentiment. Itmay thus continue to find favour from investors seeking high yields in the current low rate environment in developed countries. This, and with relatively stable monetary policy from the SARB and a lower degree of geopolitical risks compared to other EMs. Longer term however, South Africa’s ballooning budget deficit will come to the fore if the government cannot introduce hard-hitting reforms and if FM Tito Mboweni cannot improve the fiscus in the coming years. On that note, it appears Treasury is set to follow through and not offer wage increases to civil servants until after 2023-2024 fiscal year, rescinding an earlier arrangement.

As Q4 progresses, we have seen one-month currency option volatilities/prices are spiking as they now cover the US November election. The dollar may thus benefit from the political uncertainty for the month ahead. But for the day thus far, however, the dollar has been subdued as risk appetite remains buoyed after Trump returned to the White House unscathed by COVID-19. Resultantly, the chances of stimulus ahead of the US election have increased, while communications on the matter are ongoing. For the day ahead, the SARB monetary policy review is scheduled for release this afternoon in which it communicates its positions and will hold important information for fixed income markets seeing as the SARB has ventured into new monetary policy tools this year.

Expected range for the day: 16.4760 - 16.7460