DAILY MARKET UPDATE - 19 NOVEMBER 2020 | Merchant West


Merchant West Capital Markets

USD/ZAR 15.4900 | EUR/ZAR 18.3497 | GBP/ZAR 20.5077

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Produced for Merchant West by ETM Analytics

Market Commentary

Despite broad risk on trade across financial markets with most major currencies stronger against a subdued US Dollar, the ZAR ended yesterday roughly where it did the prior day. However, the local currency was far from flat intraday. After opening at 15.43/$, the USD-ZAR pair found support at the 15.30/$-handle as the ZAR bulls saw limited upside for the remainder of the day. Shortly after, retail sales figures further dampened trade as the data showed a potential slowdown in the sector’s recovery despite the easing of restrictions at the time. This coincided with the ZAR’s retreat back to 15.42/$ by the end of the day, while investors also likely pulled bets ahead of the SARB rate announcement today.
On the retail sales front, sales growth for September came in lower than expected at 1.1% compared to the prior monthly growth of 4%. On a yearly basis, sales are thus still 2.7% lower, highlighting the impact of lingering lockdown restrictions and the ongoing headwinds facing consumers. Despite a potential uptick as the festive season nears, the broader outlook is for consumption to remain relatively weak, while the same can be said for most sectors as growth will likely lag due to low confidence in a speedy economic recovery.
The economic recovery thus sits squarely on government’s shoulders as business confidence remains subdued in light of structural challenges facing the economy and global economic uncertainty. The third annual SA investment conference which concluded yesterday is therefore of grave importance should plans follow through with effective action. In an interview after the investment conference, President Ramaphosa expressed confidence that SA can contain rising debt levels and avoid the impending debt crisis. Debt levels and thus debt servicing costs have reached such high levels that the SARB’s hands are effectively tied as it is unable to raise the repo rate without exacerbating borrowing costs.
The market will look for guidance on the path of future rate hikes today, as it is largely expected the SARB will stand pat on the current repo rate at 3.5%. The central bank maintains monetary policy cannot alone promote economic growth, this needs to come from the correct government policies and political will to deal with structural challenges.
All in all, the investment conference resulted in pledges from 50 companies totalling R109.6 billion, of which R32 billion came from the New Development Bank and R8 billion from the state-owned Industrial Development Corp. While the majority of the potential economic recovery will likely come from government initiatives focused on infrastructure development, the Ramaphosa administration simultaneously needs to settle concerns of the private sector to boost investment and drive growth, a hard task even without the current pandemic. Until such a time, we may see economic growth improve only slowly and thus there is likely to be little pass through on inflation in the near term even with the SARB’s rate cuts for this year to date. This points to a lower yield environment for some time still, especially considering the risk to the global economy.
For the day thus far, sentiment has turned overnight as soaring COVID-19 cases have sparked concerns of fresh lockdown restrictions in the US. The USD has thus traded broadly stronger overnight as haven demand sapped rebounding risk appetite, while direction later in the day will likely come from US initial jobless claims providing an update to the pace of the US economic recovery.

Expected range for the day: 15.3900- 15.5100