Daily Market Report 11 Oct
1. Domestic Factors Supporting ZAR Appreciation:
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SARB Governor Kganyago’s Optimism: SARB Governor Lesetja Kganyago’s address to Parliament highlighted a positive shift in sentiment regarding South Africa’s economic outlook. He pointed out that South Africa has managed to “flush out” much of the negative news, and despite global challenges, the ZAR has been strengthening, suggesting increased investor confidence in South Africa’s resilience. This newfound positive market sentiment has helped bolster the ZAR against other currencies.
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Improved Terms of Trade: While mining sales disappointed, South Africa’s overall terms of trade—driven by commodity prices and a trade surplus—remain strong. This has been a crucial underpinning factor for the ZAR, as South Africa’s export sector, particularly in commodities, continues to benefit from global demand, even with logistical challenges like those from Transnet.
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Bond Market Appeal: South African bond yields have risen, making them attractive for carry trades. The SARB’s more conservative monetary stance relative to the Fed’s expected easing cycle has added appeal to local bonds, which have attracted capital inflows. This, in turn, has supported the ZAR as foreign investors buy local assets.
2. Challenges in Mining and Manufacturing:
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Mining Production and Sales: While mining production for August came in better than expected (+0.3% y/y), the sharp drop in mining sales (-9.9% y/y), particularly for gold (-80.5%), remains a concern. This decline is partly attributed to logistical issues limiting exports and weaker demand from China. The stronger ZAR has also made exports less competitive, further reducing sales volumes. However, the overall resilience in production is seen as a positive sign that the sector could still recover if logistical issues improve.
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Manufacturing Weakness: The manufacturing sector is still under pressure, with a notable contraction of -1.2% y/y in August. The steep decline in vehicle production (-16.1% y/y) and metals manufacturing (-5.4% y/y) has weighed heavily on the sector. Despite the easing of load-shedding, manufacturing has struggled to gain momentum, reflecting broader structural weaknesses in the economy.
3. Global Influences:
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US Data and Federal Reserve Outlook: US inflation data came in slightly higher than expected, contributing to uncertainty around the Federal Reserve’s future rate cuts. While US inflation is trending down, the rise in jobless claims points to potential economic softening. This has led markets to moderate expectations of aggressive Fed rate cuts, giving the ZAR room to appreciate as rate differentials between the US and South Africa remain attractive for investors.
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China’s Fiscal Stimulus Prospects: Investors are closely watching for guidance from Chinese authorities on a major fiscal stimulus package. Given China’s role as a significant trading partner for South Africa, any substantial Chinese stimulus could improve global demand for South African commodities, potentially supporting mining exports and contributing positively to the ZAR’s outlook.
4. FX Market Dynamics:
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The ZAR’s appreciation against the USD, EUR, and GBP is not solely linked to dollar weakness. In fact, the ZAR has strengthened on its own merits, indicating that domestic factors are playing a larger role. Improved sentiment, better bond market dynamics, and the resilience of South Africa’s terms of trade have all contributed to the ZAR’s positive performance.
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Technical Outlook: On the technical side, the USD-ZAR pair has found strong resistance at 17.6800, creating a “tweezer top” formation that suggests the ZAR may continue to consolidate below this level. On the downside, support around 17.4000 could provide a floor for ZAR strength in the near term, barring any significant shifts in global or domestic data.
5. Bond and Fixed Income Insights:
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SA Bonds Benefit from ZAR Strength: Local bond markets have tracked the ZAR’s strength rather than responding to rising US Treasury yields. This has helped compress the spread between South African and US 10-year bond yields to around 505 basis points. Investors remain optimistic that disinflationary pressures in South Africa will keep bond yields attractive, even with weak economic data.
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Inflation Linked Bonds (ILB) Auction: The ILB auction today will provide further insight into inflation expectations in South Africa. With inflation trending down and expected to fall below the midpoint of the target range by the end of the year, bond yields may continue to moderate, supporting further capital inflows into SA bonds.
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