DAILY MARKET UPDATE - 08 OCTOBER 2020 | Merchant West

DAILY MARKET UPDATE - 08 OCTOBER 2020

Merchant West Capital Markets

USD/ZAR 16.665 | EUR/ZAR 19.5661 | GBP/ZAR 21.4967

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Produced for Merchant West by ETM Analytics

Market Commentary:

Range-bound trade was the order of the day as the ZAR swung gains and losses. Markets started off depressed as US fiscal stimulus hopes faded, but comments from the White House pointed to standalone stimulus deals still possible, rather than a comprehensive package for the economy. Ultimately, the day ended in favour of the ZAR bears as the local unit closed around 16.66/$, roughly 0.6% weaker than the prior day’s close. 

Earlier in the day, the ZAR trimmed losses as it shrugged off local data showing a continued depressed business environment. The SACCI Business Confidence Index (BCI) dipped slightly to 85.7 from 85.8 in August and remains well below pre-pandemic levels. Although the worst of the lockdown is behind us, the aftereffects remain and government’s failure to address corruption and speed up reforms continue to supress business confidence, as is shown by the structural decline of the BCI over the years. The government urgently needs to make structural changes to support the economy and limit the economic consequences of the lockdowns, the absence of which will see investment and capital growth limited and continued restrained business activity will put further strain on the fiscus.

With South Africa’s comparably well-developed financial markets and high yields on offer for carry trade investors, it’s clear why the ZAR is an indicator of broader EM sentiment. However, this brings about added volatility for the currency in risk off trade conditions, especially when coupled with South Africa’s structural challenges, the potential consequences of which are mentioned above. This has caused the country to lag its economic growth potential and the reason why the currency is poised for a longer term decline. Having said that, the shorter term outlook includes the possibility of a recovery into the last few months of the year. This due to a recovery in global economic outlook and a weakening USD.

For the day thus far, it looks as though the USD has lost directional momentum to the upside following the possibility of partial stimulus packages. Emerging market currencies have thus been generally upbeat in early trade. It is, however, unclear whether this will progress as the day unfolds but the bias is for further downside moves for the USD. It is a slim data card for the day ahead and markets will have to wait for the US session for last week’s initial jobless claims data for further guidance on the US’ economic recovery, while before that investors will look to ECB speakers and the bank’s August meeting minutes.

Expected range for the day: 16.54 - 16.74