17 Dec

Daily Market Report 17 Dec

 

ZAR’s Direction Hinges on Offshore Central Bank Decisions

 

Talking Points

  • SA: EFF re-elects Malema for a third term; signals willingness to join GNU without DA.
  • SA: Deputy President Mashatile calls the GNU “not ideal” for the ANC.
  • SA: House price index grows +0.8% y/y in November, indicating modest housing sector gains.
  • Global: Major central banks (Fed, BoE, BoJ) dominate this week’s market focus.

Economic Overview

South Africa

  • Leading Indicator:

    • SA’s leading indicator remains above 112.0 since April, with September at 113.9 points.
    • Supported by:
      • GNU optimism
      • ZAR stability and falling inflation
      • Interest rate cut expectations and absence of load-shedding.
    • Outlook:
      • Near-term optimism is valid, but economic reforms will be needed to sustain improvements.
      • February’s post-GNU budget announcement will offer critical fiscal guidance.

  • Structural Dynamics:

    • The GNU remains fragile, as internal political dynamics (EFF/DA exclusion) continue to emerge.
    • Transnet and other SOE reforms show early signs of private sector inclusion, crucial for addressing infrastructure bottlenecks.

Global Central Banks – The Spotlight

This week’s focus will be on the Fed, BoE, and BoJ, with significant implications for global risk sentiment and currency markets:

  1. US Federal Reserve (FOMC):

    • Expectation: A 25bp rate cut to 4.25%-4.50%, described as a “hawkish cut” due to lingering inflation risks.
    • Key Drivers:
      • Inflation remains sticky (core CPI at 0.3% m/m for four months).
      • Fiscal expansion concerns under a potential Trump administration could slow future easing.
      • Investors will focus on the “dot plot” and Fed’s economic projections for 2025.

  2. Bank of England (BoE):

    • Expected to hold rates following November’s cut.
    • Higher UK CPI projections (forecasted at 2.6% in November) suggest caution.

  3. Bank of Japan (BoJ):

    • Likely to maintain policy amid uncertainty on inflation sustainability.
    • Yen volatility remains elevated due to speculation on a potential December rate hike.

Market Insight – FX

ZAR Analysis

  • Spot Rate: 17.8450; Range: 17.6050/9050.

  • Drivers:

    • Fed Policy: While a rate cut is anticipated, a less dovish tone could strengthen the USD, limiting ZAR gains.
    • EUR Weakness: The ECB’s easing stance has widened the US-EU rate differential, boosting the USD’s resilience.
    • ZAR Resilience:
      • Stronger terms of trade (supported by commodity prices like gold).
      • Rising optimism around structural reforms and SOE privatization.
      • Positive sentiment towards the GNU’s reformist agenda has underpinned the ZAR.

  • Outlook:

    • If the Fed strikes a hawkish tone, ZAR could test the upper range (17.9050).
    • A dovish outcome, however, could push ZAR towards the lower support (17.6050).

Global FX Trends

  • USD:

    • The “Trump trade” continues to fuel USD strength, driven by inflationary risks tied to protectionist policies.
    • Treasury yields are elevated, limiting downward pressure on the greenback.

  • EUR/USD:

    • Weakness persists post-ECB rate cut, trading near 1.0516.
    • Markets expect further ECB easing in 2025, widening the EUR-USD yield spread.

  • GBP/USD:

    • Firm support at 1.2600, but resistance near 1.2700 suggests range-bound trade.
    • UK CPI data this week will influence short-term direction.

  • USD/JPY:

    • Consolidates near 154.00 as speculation around a BoJ rate hike persists.
    • Yen volatility could intensify if BoJ surprises markets with a tightening stance.

Market Insight – Fixed Income

SA Bonds

  • Yield Trends:

    • US Treasury yields have risen ahead of the Fed meeting, influencing global fixed-income markets.
    • SA 10-Year Spread: Compressed to 452bp over US 10-year Treasuries.
      • A tighter spread raises concerns about ZAR volatility, especially if risk sentiment sours.

  • Key Dynamics:

    • The SARB’s conservative monetary stance is supportive of bonds, especially as PPI deflation signals contained inflation risks.
    • Markets are increasingly pricing in three rate cuts by the SARB in H1 2025.

  • Outlook:

    • The Fed’s decision will be pivotal for global bond markets.
    • Any hawkish surprises could push US Treasury yields higher, impacting SA bond yields and ZAR stability.

FRAs

  • Current Pricing:

    • 3X6 Spread: -39bp, indicating another 25bp rate cut in January.
    • 6X9 Spread: -69bp, pricing in three cuts by mid-2025.
    • 12X15 Spread: -83bp, signaling the possibility of four rate cuts in 2025.

  • Drivers:

    • ZAR resilience and benign inflation support expectations of further easing.
    • The Fed’s stance this week will determine the extent of global rate convergence in 2025.

Strategic Insights

Short-Term Focus

  1. Fed Decision:

    • Watch for a hawkish cut and updated economic projections.
    • A conservative tone will likely support the USD and pressure EM currencies, including ZAR.

  2. BoE & BoJ:

    • BoE’s stance on inflation risks and BoJ’s policy outlook will drive GBP and JPY volatility.

  3. ZAR Outlook:

    • Consolidation is likely this week as liquidity thins out ahead of year-end holidays.
    • The ZAR’s resilience hinges on stable risk sentiment and Fed policy clarity.

Long-Term Outlook

  1. Structural Reforms:

    • Continued SOE privatization and fiscal consolidation remain critical to sustaining ZAR strength.
    • February’s budget will be a litmus test for investor confidence.

  2. Global Monetary Trends:

    • Divergence in central bank policies (Fed vs. ECB and BoE) will shape FX and bond market dynamics in 2025.
    • China’s stimulus measures could stabilize commodity demand, benefiting SA exports.

 

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.