DAILY MARKET UPDATE - 14 OCTOBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 16.4625 | EUR/ZAR 19.3186 | GBP/ZAR 21.2805

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Produced for Merchant West by ETM Analytics

Market Commentary:

In contrast to Monday’s manufacturing production data, domestic mining output showed further signs of recovery in August. Mining production fell 3.3% from August last year, while the previous y/y contraction in July came in at -6.4%. Although an improvement, the industry has remained in contractionary territory since the onset of COVID-19 global pandemic and will thus drag on economic growth until there is a sufficient rise in output. Going forward, new investment on a large scale is needed to revive the industry and achieve growth in output. Without significant policy reforms, this seems unlikely and thus growth expectations will be soft.

The ZAR, however, capitalised on this seemingly positive data release on a day where most emerging market and major currencies traded lower against the US dollar. On a larger scale though, the ZAR’s movements have been mostly sideways this week in the run up to Thursday’s recovery plan presentation by President Ramaphosa. The local unit nevertheless secured a marginal gain yesterday, making it a top performer against the USD as it closed around the 16.47/$-mark.

As the global economy reels in the aftermath of the COVID-19 pandemic, the IMF has provided a somewhat positive update on global growth expectations. The international organisation lowered its projection for a 5.2% global contraction this year to 4.4%. It did, however, emphasize that the outlook remains highly uncertain and advised authorities not to withdraw fiscal and monetary stimulus too soon. On the balance the outlook for developing nations worsened. Countries without large balance sheets to support their economies will remain a high risk due to generally inferior economic rebounds underfoot and fiscal performances over the period. This is true for South Africa, while the country’s large reliance on external funding poses additional risks. The IMF maintained its 8% contraction projection for SA this year but worsened its outlook for next year (from 3.5% growth to 3%).

In overnight developments, multiple COVID-19 vaccine delays announced this week as well as the US House Speaker’s rejection of the Trump administration’s $1.8 trillion stimulus package offer has lowered risk appetite. The USD subsequently traded stronger and has held onto gains overnight. Looking further out, risk events within the next three weeks are aplenty hence traders may shy away from riskier bets. The greenback may thus find support in this respect and EM currency moves to the upside will be soft in absence of a significant risk-asset rally. Domestically, National Treasury submitted a request last night to postpone the medium term budget statement by one week to 28 October. Unsurprisingly, this comes shortly after a presidential advisory panel suggested Treasury’s debt targets are too radical for the government to meet in the context of the current economic environment. In the short term, investors will favour SA’s high yields on offer, but the delay points to a lack of urgency to reduce fiscal pressures and thus the medium to long term outlook remains dire. For the day ahead, retail sales for August will be on the local data card and is expected to show a continued recovery from April lows. With demand still weak amidst high employment, it is unlikely that we see a significant rebound in the short term.

Expected range for the day: 6.3600  - 16.5075