DAILY MARKET UPDATE - 12 OCTOBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 16.49 | EUR/ZAR 19.4789 | GBP/ZAR 21.4758

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Produced for Merchant West by ETM Analytics

Market Commentary:

With emerging market currencies gaining across the board, the ZAR capitalised as risk-on trade drove the US Dollar weaker. The local unit posted a 0.7% gain against the greenback on Friday which put it marginally in the green for the week as it closed around the 16.46/$-handle. With FX markets taking most inspiration from the dollar-leg at present, the ZAR and other EM currencies remain pegged to US stimulus hopes and whether it will occur before the November elections. On that front, the USD’s slide continued on Friday as the Trump administration pushed another proposal for a $1.8 trillion stimulus package, greater than the previous offer and closer to the $2.2 trillion that Democrats are aiming for.

In the case of the ZAR, the local currency should continue to rally amongst other EM currencies for as long as positive risk appetite allows. The unit has traded within the 16.40-16.80/$ range for the past week and a half, with these levels providing support and resistance after the ZAR’s failed attempts to move out of these bounds. The week ahead could be a turning point on that regard as there are plenty factors for the currency to move on, notably being US stimulus updates, while a slew of domestic economic data will be released ahead of an address on Thursday by President Ramaphosa where he will be outlining the long-awaited Economic Reconstruction and Recovery Plan to support the country’s path out of the COVID-19 pandemic.

The week thus far has started with less of a downwards bias for the USD as the Trump administration’s newly proposed stimulus package drew criticism from Republican leaders, while risk appetite is tetchy after several European nations have implemented measures over the weekend to control the spread of new coronavirus infections. With the tide turning for EMs, the USD-ZAR pair jumped higher this morning but has subsequently narrowed the gap and traded towards Friday’s close.

For the day ahead, the market will wait on next steps regarding US stimulus as it continues to feed the risk-on, risk-off narrative, and locally we will have August’s manufacturing production data. Amongst other important economic data releases this week, this will offer insight into the country’s recovery and how much of the initial bounce back has been sustained. Due to South Africa’s structural challenges, however, the manufacturing sector has remained in contractionary territory for well over a year. Exacerbated by April’s hard lockdown, an already weak business environment and a highly uncertain global economic backdrop implies the move back to pre-pandemic levels of production will be gradual at best. For as long as South Africa’s growth potential is impeded, this will continue to weigh on the currency’s ability to stage a recovery going forward and worsens implications in the longer-term.

Expected range for the day: 16.40 - 16.57