DAILY MARKET UPDATE - 15 OCTOBER 2020 | Merchant West

DAILY MARKET UPDATE - 15 OCTOBER 2020

Merchant West Capital Markets

USD/ZAR 16.5525 | EUR/ZAR 19.4482 | GBP/ZAR 21.5423

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Produced for Merchant West by ETM Analytics

Market Commentary:

Risk-off trade prevailed yesterday despite a softer US dollar on a trade-weighted basis from the previous session. Due to delays in COVID-19 vaccine production and further US stimulus impasses, emerging market currencies traded weaker on aggregate with the ZAR near the bottom of the EM sample, only faring better than the Russian RUB. The local unit was under added pressure from the proposed postponement of the medium term budget policy statement (MTBPS), which raises fiscal concerns as to whether government will be able to meet its medium term debt goals. As a result, the ZAR was pushed back above the 16.50/$-handle as it lost -0.42% on the day.

In terms of data yesterday, the ZAR shrugged off the retail sales print even though August’s sales figure showed the contraction was decelerating. Year-on-year retail sales fell -4.2% from -8.6% in the month prior, while they rose 4% on a monthly basis from 0.6% in July. The rebound bodes well for the country’s much needed economic recovery but the question remains for how long it can be sustained. The retail sector has remained in contractionary territory for the fifth straight month which feeds the view of a severely depressed tax intake this year due to lower corporate profits and supressed disposable incomes. To get back to pre-pandemic levels of demand, structural growth headwinds remain too, all of which suggests it will be a prolonged recovery for the retail sector.

Lower tax intake will be amongst top concerns for investors as South Africa edges towards the fiscal cliff, however, these concerns will be most prominent in the medium to long term. Nevertheless, the remainder of the month will be extremely important in that regard, with President Ramaphosa expected to outline the economic recovery plan this afternoon and the MTBPS at the end of the month.

Externally, markets are signalling clear risk-off conditions after the US Treasury Secretary said a stimulus deal is unlikelybefore the November election. The USD subsequently strengthened overnight, while sentiment has taken an equal hit due to rising coronavirus cases in Europe, sparking concerns of renewed harsh lockdowns. While rising infections may be largely localised to Europe, this shows there is still a risk of global second wave, while renewed lockdowns in the Eurozone area will have global trade ramifications of its own.

The day ahead is looking depressed for risk assets with the majority of EM currencies weaker alongside global equities in overnight and early trade. Further direction may come later in the session from the high frequency US jobless claims data, otherwise COVID-19 infections in Europe is to remain front and centre. Locally, the market will have Q2’s non-farm payrolls to digest ahead of the recovery plan presentation and, although it is unlikely to be market-moving since we have already seen the extent of the lockdown on the labour market, it will show a steep and further contraction as the economy was already in a technical recession prior to the pandemic.

Expected range for the day: 16.5200 - 16.6385