DAILY MARKET UPDATE - 07 OCTOBER 2019
Merchant West Capital Markets
USD/ZAR 15.0775 | EUR/ZAR 16.5401 | GBP/ZAR 18.5592
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Friday saw a mixed report released for the US labour market for September, as the number of jobs added to the US economy fell from an upwardly revised 168k (prior 130k) to 136k in Sep. Slower wage growth was also recorded in Sep, with average hourly earnings flat on the month and up 2.9% y/y, down from 3.2% y/y in Aug. The unemployment rate, on the other hand, declined to another multi-decade low of 3.5% from a prior 3.7%. While a record-low unemployment rate suggests that there is little slack in the US labour market, it also serves as a contrary indicator for recession risk in the US. Whether unemployment can fall further remains to be seen, but the maturity of the business cycle suggests that unemployment may be bottoming out.
The rand ended the week at R15.05/dollar, which marked a significant recovery from lows of R15.40/dollar achieved during the week. However, week-on-week, the USD-ZAR pair posted only a marginal 0.4% fall. When compared with a 2.6% appreciation in the Brazilian real, this shallow recovery points to a degree of hesitation in the market. This seems likely to be due to the still uncertain outlook for SA fiscal reform, as the 30 October MTBPS approaches, and as the jury is still out on whether there is sufficient political will for the sweeping changes required at multiple levels of government for fiscal sustainability to be restored.
The recovery is a sign that investors are taking heed of the incremental improvements in the fiscal outlook, although expectations for policy easing offshore will be keeping currency dynamics more ZAR supportive too. That there have been some month-to-date inflows into SA bonds could be taken as a sign that foreign investors are seeing some value at current ZAR and bond yield levels, although these could reverse if markets are stressed again by external market volatility. We would be surprised to see a bull run on ZAR assets in the near term as there is still a long road for National Treasury to walk before we can declare that fiscal reform is materialising.
The SARB’s relatively tighter monetary policy stance is also a crucial factor keeping the ZAR supported, particularly with the Fed looking set to continue easing this year. In the absence of a high SA-US rate differential, the ZAR could be trading at much weaker levels than it is today. This will keep the focus on the FOMC minutes set to be released later this week Wednesday, as well as key consumer confidence metrics like Michigan consumer confidence due on Friday. A measured start to the week expected for the ZAR.
Range for the day: 14.85 - 15.10