DAILY MARKET UPDATE - 11 NOVEMBER 2020 | Merchant West

DAILY MARKET UPDATE - 11 NOVEMBER 2020

Merchant West Capital Markets

USD/ZAR 15.5600 | EUR/ZAR 18.3922 | GBP/ZAR 20.6476

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Produced for Merchant West by ETM Analytics

Market Commentary:

Following the recent bull-run and a substantial rally at the start of the week, emerging market (EM) currencies came under pressure yesterday as investors looked to book profits and determine which direction the next catalyst would take the market. However, this was more than just a slight correction for the ZAR, which ended the worst among the EM basket, as the currency weakened 1.55% on the day and reversed almost all of the prior day’s gains.

Though EM currencies were down in majority, the US Dollar was equally subdued against the Pound, Yen and unmoved against the Euro. As such, further moves higher for the DXY, the US Dollar index which tracks the greenback on a trade-weighted basis, were pared and the USD closed weaker on aggregate as a result. Full on risk taking thus seems to be slowing down as the market begins to question current asset prices in the context of an ever changing economic backdrop. Whether another risk rally will occur remains to be seen, but considering current market cautiousness, another solid bull-run would need a strong catalyst on the COVID-19 vaccine front, to offset investor worries of further lockdown restrictions to contain the spread.

With the global economy far from being out of the woods, markets will thus remain highly headline driven. Meanwhile, our local currency continues to shrug off domestic developments, rather tracking external sentiment. The ZAR was unmoved yesterday by further signs of recovery in the manufacturing sector which rose more than expected on a monthly basis in September, putting the sector at a yearly contraction of -2.6%. Although this feeds the view of a positive economy recovery in Q3, risks are skewed to the downside as global and local demand could still weaken as lockdown measures are reimposed, while South Africa’s continued recovery also depends on structural challenges being addressed.

With the ZAR unreactive to domestic developments, the currency similarly shrugged off headlines that an arrest warrant has been issued for ANC Secretary General Ace Magashule relating to his involvement in a R255-million asbestos audit contract in the Free State. With large names being brought to book, this should improve perceptions towards the Ramaphosa administration and the promised crackdown on corruption and state capture. Although this would do well for investor confidence in the longer term, it does raise the possibility of further political instability, should the ruling party become increasingly factionalised.

Although yesterday’s local developments did little to halt the ZAR’s slide, the currency has recovered some losses overnight, partaking in a slight topside tilt amongst EM currencies this morning. A slim data card for the day ahead will leave markets at the mercy of global risk appetite, while domestically President Ramaphosa will appear in parliament to answer questions relating to the economic reconstruction and recovery plan, as well as efforts to combat corruption.

Expected range for the day: 15.5060 - 15.7000