DAILY MARKET UPDATE - 17 NOVEMBER 2020
Merchant West Capital Markets
USD/ZAR 15.3075 | EUR/ZAR 18.1675 | GBP/ZAR 20.2385
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Market sentiment was once again given a boost at the start of the week by developments in another COVID-19 vaccine trial as pharmaceutical firm Moderna announced a 94.5% effective vaccine. This saw global equity markets surge ahead, while emerging market currencies capitalised against a broadly weaker US dollar. Similar moves for the greenback seen last week as Pfizer revealed results of its vaccine trials were offset by new restrictions being imposed in several US states as COVID-19 infections continue to climb.
A subdued USD and demand for higher-beta assets saw the ZAR rise 1.17% from Friday’s close to be a top performer in the EM sample on the day, bested only by the Russian RUB, as the unit ultimately ended local hours near the 15.32/$-handle. Further topside moves for the ZAR should come so long as global risk appetite allows, as the currency is generally labelled as a lightning rod for emerging market sentiment. However, key risk events for the remainder of the week could put a damper on those moves to some extent.
Market makers are pricing in higher hedging costs for the ZAR, with one-week implied option volatility rising as it covers this week’s SARB rate announcement and ratings agencies decisions on Friday. This happens in anticipation of greater expected volatility over the life of an option, here owing to event risk and the tendency for exacerbated currency moves as a result. Thus, bullish direction for the ZAR may be hindered despite continued USD weakness. More specifically as to the MPC decision, the SARB is expected to hold its repo rate steady at 3.5% despite a stronger than forecasted recovery in third quarter GDP, especially as risks remain to South Africa’s economy as rising virus cases externally and lockdowns dampen global trade activity. The market will thus rather be looking for guidance on the path of future rate hikes, while further rating downgrades from S&P and Moody’s could derail the positive ZAR sentiment of late.
As for today, the USD has steadied overnight which has halted further downside moves for the USD-ZAR pair. Currently, the ZAR is trading around yesterday’s close of 15.32/$ ahead of the domestic session as traders wait for a catalyst to provide direction for the day ahead. Locally, we have the third annual SA investment conference today that may have market-moving potential domestically as the government plans to attract more than R1 trillion over the next five years. Externally, markets remain upbeat although signs of an unsmooth presidential transition could put a dent in optimism. Later in the day, the market will look Stateside for an update on the US economic recovery with retail sales and industrial production headlining the data card.
15.2840 - 15.4055