DAILY MARKET UPDATE - 18 NOVEMBER 2020 | Merchant West

DAILY MARKET UPDATE - 18 NOVEMBER 2020

Merchant West Capital Markets

USD/ZAR 15.4000 | EUR/ZAR 18.2600 | GBP/ZAR 20.4090

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email: treasury@merchantwest.co.za

Produced for Merchant West by ETM Analytics

Market Commentary

As markets gauge the expected time to vaccine introduction, initial optimism thereof will naturally fade with the remaining short-term economic risks as yet far from being mitigated. As a result, global risk assets will continue to track the ebb and flow of market sentiment. The ZAR for one traded defensively yesterday following a positive start to the week for the local currency as it ended -0.66% down for the day, the worst emerging market performance on the day. However, this occurred against a broadly weaker US dollar, suggesting investors preferred to book profits and stick to the side-lines ahead of the SARB rate announcement and credit rating agencies’ decisions.

Ultimately, the ZAR traded weaker to the 15.43/$-handle as it ended a three-session risk asset rally. Despite the looming event risk, the ZAR could still be set for further short-term appreciation as the SARB is largely expected to hold rates steady, while a credit rating reduction further into junk status could arguably be priced in already with the ZAR lingering at historically weak levels. Furthermore, as of last week speculators remained net bullish on the ZAR and at the highest level since March with the net long position at $0.22 billion according to CFTC data. This occurred amidst rising stock and bond market inflows through November so far. In the context of South Africa’s seemingly forthcoming fiscal crisis, this is quite telling of the extremely accommodative monetary policies around the world supporting financial markets at present.

Central banks the world over will likely maintain an accommodative stance for as long as the global economic recovery remains hindered by rising COVID-19 cases and consequent lockdowns. US Federal Reserve Chairman Jerome Powell noted the US recovery still had a long way to go yesterday and reiterated that the central bank will make use of all policytools to support the recovery. Thus in the absence of fiscal support Stateside, monetary policy will remain loose which should drive flows back into emerging markets, barring another major shock.

Overnight though, sentiment has somewhat been dampened after US retail sales increased less than expected in October. This will raise concerns that rising infections could continue this trend, while Europe is likely experiencing a double dip recession of its own currently. The ZAR, however, is paring yesterday’s losses as it appears to be moving with a topside tilt, having held below yesterdays close in early trade. For the day ahead, the market will look to domestic retail sales data for September, with the expectation of a slight improvement in the retail sector as South Africa moved to level-one restrictions in mid-September.

Expected range for the day: 15.3700 - 15.4375