DAILY MARKET UPDATE - 09 OCTOBER 2020
Merchant West Capital Markets
USD/ZAR 16.5675 | EUR/ZAR 19.4677 | GBP/ZAR 21.4231
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Produced for Merchant West by ETM Analytics
While markets are quick to focus on prevailing US stimulus progress, the US dollar has thus been whipsawed throughout the week and is currently facing another weekly loss as markets reprice in further fiscal aid. As a result of the whiplash action, the ZAR too has been range-bound this week and yesterday was no exception. The local currency encountered choppy trade throughout its 16.55-16.67/$ range during the day, but managed to capitalise on USD weakness later in the session after US initial jobless claims data remained stubbornly high. Ultimately, the ZAR ended near the top of a mixed EM basket with a 0.5% gain after encountering volatile afternoon trade and the day ending with a further downwards bias for the USD.
Looking at the options market for hints of volatility to come, prices are moderating which suggests volatility is stabilising, implying less of an effect of upcoming event risk. Specifically, one-month risk reversals (used to hedge against unfavourable price movements), which now cover the medium term budget policy statement, are edging lower. Corroborating these moves, the CBOE’s Volatility Index (VIX) incurred substantial downwards moves over the past two days.
The cause of this is linked to the general improvement in global sentiment. Although helping the ZAR unwind its current undervaluation, idiosyncratic risk factors will then come to the fore. The World Bank provided updated growth forecasts yesterday for Sub-Saharan Africa, with the region expected to contract 3.3% this year, compared to the South Africa’s estimate of a 7.2% contraction. In order to make back what was lost, the country desperately needs a significant bounce back in the years following, permissible only by the removal of structural challenges faced by the economy. In addition to subdued economic growth, there is still to be a raft of state-owned enterprises requiring government handouts to stay afloat. The Land Bank of South Africa was in headlines yesterday after responding to questions that it would need a further R10 billion over the next few years while it has already received R3 billion in the current fiscal year. The continual drain on the fiscus from ailing SOEs will undoubtedly drain on sentiment towards the ZAR and limit its recovery going forward.
There is not much in the way of market moving data for the day ahead and thus US stimulus negotiations will remain front and centre as we head into the weekend. Although US lawmakers are struggling to find a middle ground, recent developments are for a push for standalone bills to support the economy, while US House Speaker Pelosi wants a guarantee that a comprehensive bill would follow. This has kept markets buoyed since yesterday’s close and, if this directional impetus can be sustained, the ZAR will be on track for a minor weekly gain.
Expected range for the day: 16.47 - 16.63