DAILY MARKET UPDATE - 13 OCTOBER 2020 | Merchant West

DAILY MARKET UPDATE - 13 OCTOBER 2020

Merchant West Capital Markets

USD/ZAR 16.58 | EUR/ZAR 19.5443 | GBP/ZAR 21.6088

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email: treasury@merchantwest.co.za

Produced for Merchant West by ETM Analytics

Market Commentary:

Optimism from last week was muted as the majority of the EM basket came under selling pressure with gains few and far between. The ZAR was mostly flat on the day yesterday, moving in line with the US dollar which held steady near three-week lows. The local unit hovered around the 16.50/$-handle for most of the day in US-holiday thinned trade, with neither the ZAR bulls nor bears able to solidify moves.

The release of August’s manufacturing data did little to boost sentiment towards the ZAR either as the sector remained in contractionary territory for the 15th month. Manufacturing production slumped 10.8% y/y in August, compared to 10.2% decline in the month prior and consensus expectations for a lesser contraction of 7.8%. This points to ongoing struggles within the domestic manufacturing industry and feeds the view of a prolonged recovery for the SA economy as manufacturing makes up roughly 11% of GDP. Furthermore, second waves of the coronavirus globally could have an effect on domestic production looking ahead, and structural issues within the country will cause reduced output for some time still.

For the South African economy to stage a meaningful recovery, we maintain it must be accompanied by harsh reforms within government to cut back on wasteful spending and ensure the country’s structural challenges are limited. Investors will be closely watching for hints of political will within government for strict reforms, notably at the outlining of the economic recovery plan on Thursday and Finance Minister Tito Mboweni’s medium term budget statement in two weeks’ time. Sources which have seen Thursday’s recovery plan indicate a long list of projects with limited mention of funding.Additionally, an advisory panel to the President has warned against spending cuts which will curtail the economic recovery underway. This goes against FM Mboweni’s task of reigning in expenditure and bringing down government’s debt to GDP levels as they are projected to soar in the coming years.

Although the ZAR has sufficient domestic events to move on this week and trade for the currency is likely to be cautious as a result, its movements will remain subject to broad risk appetite. Consequently, demand for the US dollar will drive most EM currency movements with the market focusing on the upcoming US election and potential stimulus. The market is, nevertheless, counting on stimulus eventually which will weaken the greenback but the question is whether this will occur before the November election. In the event of a Biden victory as polls are suggesting, the stimulus could be greater than a potential bipartisan agreed package beforehand and thus the dollar could slump further still. For the day ahead, mining production will headline the domestic data card, while external prints include Eurozone economic sentiment data ahead of US inflation later this afternoon.

Expected range for the day: 16.5025 - 16.6385