DAILY MARKET UPDATE - 16 OCTOBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 16.66 | EUR/ZAR 19.4858 | GBP/ZAR 21.4638

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Produced for Merchant West by ETM Analytics

Market Commentary:

Thursday saw a heavy risk-off tone as the day was mired in rising European virus cases, stalling recoveries, as US weekly jobless claims remained elevated, and US stimulus impasses. Locally, non-farm payrolls (NFPs) showed a considerable drop in the labour market, with payrolls declining both on a yearly and quarterly basis in excess of 6%. Looking forward, given the poor macroeconomic backdrop and the gradual lessening of lockdown measures in Q3, NFPs are expected to show similar pressure this quarter and ahead, signalling subdued domestic consumption dynamics.

Thus, prior to President Ramaphosa outlining the long-awaited economic recovery plan, the ZAR was already under pressure from a rebounding US Dollar. The USD-ZAR pair traded to a high above 16.70/$ as greenback demand rose throughout the day, solidifying against other haven currencies too, being the Japanese Yen and Swiss Franc.

In terms of the economic recovery plan, the main focus will be on infrastructure development, while removing red tape for certain industries and other structural hurdles was highlighted as avenues to spur economic growth. The list of projects and developments was vast, from dealing with the country’s unstable electricity supply, enhancing tourism and mining output, while immediate actions include extending the special COVID-19 grant for an extra three months. Government’s economic recovery plan aims to target an annual average growth rate of 3% over the next decade, something critics will say is too optimistic at present. Ramaphosa also noted that South Africa cannot maintain its current path of surging public debt levels, where a notable amount of revenues goes to service that debt instead of supporting economic growth. The same can be said for reckless government expenditure over the past decade for which increased debt uptake became necessary. In any case, significant reforms are needed to control expenditure and to reduce the amount of debt needed to run the country. It thus remains to be seen whether or not government follows through with implementation as progress has been slow on that front since Ramaphosa took office. Over that time, we have seen a further deterioration ineconomic and fiscal dynamics, and the COVID-19 economic shock has made it imperative to begin implementation in the short run to prevent an unsustainable debt build up within the next 3-5 years. This makes the upcoming medium term budget update by FM Tito Mboweni all the more important as details on financing projects were limited, barring some mention of private and public sector partnerships.

For the day ahead, an empty local data card will see the ZAR at the mercy of global risk appetite as it has done so since earlier this year. The local unit is hovering near yesterday’s close of 16.66/$ at the time of writing, while the USD has held onto gains overnight and continues to pressure other currencies in early trade. Providing direction later this afternoon, the market will have a slew of US economic and consumer confidence data to digest, potentially corroborating yesterday’s depressed jobless claims data.

Expected range for the day: 16.6025 - 16.7200