Daily Market Report 10 Oct
1. US Monetary Policy and Rate Cut Adjustments:
- The FOMC minutes released indicate that while there was strong support for a 50 basis point (bp) rate cut, the pace of future rate cuts won’t necessarily follow this aggressive approach. The Fed appears to be front-loading cuts in anticipation of slower economic growth, but with no rush for further cuts unless warranted.
- US Treasury yields rose as a result, reflecting stronger-than-expected US economic data and reduced expectations of rapid rate cuts. Higher US yields attract global investors towards USD-denominated assets, increasing demand for the USD and putting pressure on other currencies like the ZAR.
2. Impact on the ZAR:
- The ZAR’s depreciation is primarily driven by the resurgence of the USD, not necessarily by negative domestic news. The ZAR is tracking movements in other emerging market currencies, all of which have struggled as the USD strengthens.
- Expectations of US inflation data, specifically the CPI, will be pivotal. Lower CPI could slow down USD appreciation, but the current consensus is for inflation to remain sticky. This means continued USD strength and a weaker ZAR, at least in the short term.
3. Domestic Factors in South Africa:
- Transnet’s tender issues and the broader infrastructure challenges (such as delays at Durban port) exacerbate South Africa’s ability to attract investment. The inefficiencies in logistics, combined with structural economic constraints, are limiting growth potential.
- Mining and manufacturing data due soon are not expected to provide much relief, given South Africa’s structural inefficiencies in infrastructure and governance, which have resulted in stagnation, particularly in bulk commodities like iron ore.
- The construction mafia (extortion groups disrupting construction projects) is another factor weighing on investor confidence. This kind of domestic turmoil discourages much-needed fixed investment, already at alarmingly low levels (14.6% of GDP).
4. South Africa’s Bond Market and FX Markets:
- The ZAR and SA bond market have faced pressure due to the global rise in US Treasury yields. Investors, previously drawn to South African bonds through carry trade (where they profit from interest rate differentials), are now retreating, given the more attractive yields in the US.
- Although the SA Reserve Bank (SARB) has maintained a conservative stance, offering some stability, the bond market’s recent sell-off reflects the global shift towards risk-off sentiment. Should inflation continue its global decline, SA bonds may attract capital again in the next 6-9 months.
5. Short-Term and Long-Term Outlook:
- In the short term, much of the focus will be on the upcoming US inflation figures and how they influence USD strength. Even if CPI comes in lower than expected, the market seems to have largely priced in the Fed’s cautious approach, meaning that significant ZAR recovery against the USD is unlikely in the near term.
- Long-term factors, particularly structural reforms in South Africa, will determine whether the ZAR can maintain or regain ground. If South Africa manages to address its infrastructure challenges and restore investor confidence, there is potential for recovery, particularly if global disinflationary trends reduce the strength of the USD over time.
Why Choose TreasuryONE?
Minimise the impact of market volatility on your bottom line by getting access to an experienced team of dealers that provides expert market advice – validated by facts and figures, not feelings or hearsay.
We customise risk management strategies to achieve the most competitive rates in a fast-moving and complex marketplace.
We provide effective and measurable processes for managing:
- Exchange Rate Risk arises when an organisation conducts business in multiple currencies, either through exports and imports, or through foreign operations.
- Commodity Price Risk is the financial risk posed to an entity’s financial performance and profitability by fluctuations in commodity prices that are primarily driven by external market forces and are therefore beyond the entity’s control.
- Interest Rate Risk management for companies involves identifying, measuring, and managing the potential impact of changes in interest rates on a company’s financial position and profitability.