DAILY MARKET UPDATE - 07 OCTOBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 16.675 | EUR/ZAR 19.5527 | GBP/ZAR 21.4541

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Produced for Merchant West by ETM Analytics

Market Commentary:

A mixed day for emerging market currencies yesterday and, in consistent fashion, a turbulent one for the ZAR highlighting its ability to express broader EM sentiment. The local unit was whipsawed throughout the day and finally settled at 16.57/$, 0.2% weaker than the prior day’s close. Markets were generally buoyed by US President Trump’s return to the White House and hopes for further stimulus to come through before the November election. Those hopes have now all but disappeared overnight as Trump called for Republican representatives to halt stimulus negotiations until after the election. Further upsetting investors, this occurred after US Federal Reserve Chair Jerome Powell called for further fiscal stimulus to avert a downwards economic spiral. Markets had to some degree priced in chances of a stimulus package before the election, however with that no longer possible, the US dollar has gapped higher on a trade-weighted basis overnight.

Domestically, the SARB monetary policy review released yesterday afternoon showed the central bank is holding onto its wait-and-see approach and expects rates to remain low for an extended period, but failed to mention specific timelines for the path of interest rates. The SARB noted that current low interest rates would go further if there was greater medium-term certainty within the economy, while the return to pre-pandemic levels of production is being held back by constraints such as electricity blackouts, rising government debt and low consumer confidence. All in all, this suggests that the SARB’s rate cut cycle may be over and focus is shifting to alleviating fiscal and structural constraints. 

For the day ahead, South Africa’s biggest trade union federation COSATU has called for a major strike occurring today to protest against government corruption, unemployment and the ongoing public sector wage dispute, amongst others. Although an inopportune time, when the economy can ill-afford further shocks, it should be expected that unrest amongst the population is growing at this time where government’s shortcomings have been emphasised by the pandemic. With the longer term effects of the lockdown becoming apparent, confidence within the economy for a sustained recovery is likely to diminish. A slowing down of the recovery is likely to be shown in today’s release of the SACCI business confidence index, where both August and September prints will be published. Before that however, gross and net reserves will be published for September, with the expectation being a slight dip after the USD’s strengthening and gold price dip last month.

Externally, markets have adopted somewhat of a risk-off tone following Trump’s order to delay stimulus negotiations. The USD has held onto gains, pressuring emerging market currencies, while the greenback has not been able to get a substantial leg up on the Japanese Yen, another haven currency. Scheduled for release later today, global markets will look to the US Fed FOMC’s last meeting minutes for an update on the economic outlook. It is likely to echo yesterday’s sentiment from the Fed Chair that the US requires additional fiscal aid to prop up the economic recovery.

Expected range for the day: 16.54 - 16.75