21 Jan

Daily Market Report 21 Jan

ZAR Gains as Trump Adopts Strategic Approach to Tariffs

Key Developments

  • SA Reforms: Finance Minister Enoch Godongwana promotes reforms and targets regaining investment-grade status within two years, alongside S&P’s optimism on infrastructure spending benefiting banks and the economy.
  • Unions & Pay Deal: A 5.5% wage increase deal is nearing, above inflation expectations, indicating potential labor stability.
  • Trump’s Inauguration: President Trump did not immediately announce tariffs but hinted at potential 25% duties on imports from Canada and Mexico. He directed federal agencies to investigate trade deficits, suggesting a measured approach to tariffs for maximum negotiation leverage.

Market Insight – FX

  • ZAR Performance:
    • Spot: 18.5750; Range: 18.40/6850.
    • The ZAR benefited from USD weakness after Trump refrained from an immediate tariff announcement, with the USD retreating to mid-December levels. Positive signals from Davos on SA reforms and infrastructure investment also contributed to the ZAR’s resilience.
  • USD Dynamics:
    • Treasuries: Yields eased as concerns over aggressive tariff policies diminished.
    • Outlook: While USD remains overvalued, further declines will depend on Treasury yield movements and clarity on Trump’s policies.

Market Insight – Fixed Income

  • US Treasuries:
    • Yields retreated: 10-year at 4.54%, 30-year at 4.789%, and 2-year at 4.228%.
    • Futures markets now anticipate a 50% chance of a Fed rate cut by May, driven by inflation concerns tied to Trump’s policies.
  • SA Bonds:
    • Limited response to US Treasury movements; focus remains on domestic reforms and today’s auction of long-term bonds (R213, R2035, R2053), which will offer insights into fiscal risk.

Global Context

  • Tariffs & Trade: Trump’s restrained tariff approach provided temporary market relief, though gradual implementations remain a concern for inflation and Fed policy.
  • Currencies: The USD weakened, with EUR/USD approaching 1.0400, while GBP/USD remained volatile, and JPY strengthened amid expectations of a BoJ rate hike.

Outlook

  • Focus on Policy: Trump’s evolving trade and fiscal policies will dominate market direction. SA’s reformist tone at Davos and infrastructure plans bolster optimism, but execution will be key.
  • Short-Term ZAR: Likely to consolidate near current levels, influenced by USD trends and domestic economic indicators.

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