South Africa’s Economic Outlook:
- Retail Sales Growth: South Africa’s retail sales outperformed expectations, growing by 3.2% y/y in August, a significant improvement over the previous month’s revised 1.7% increase. This marks the sixth consecutive month of expansion, reflecting post-GNU optimism, a stronger ZAR, and decelerating inflation. However, while these factors support consumption, tight monetary conditions and high unemployment remain constraints on future growth.
- Monetary Policy Outlook: With the SARB’s rate-cutting cycle expected to begin soon, the ZAR remains supported by the outlook for lower interest rates. The SARB’s room to reduce rates is enhanced by inflation forecasts showing a drop toward 3.0% by early 2024. Although structural challenges, such as unemployment, persist, the overall picture is improving for domestic demand and investment.
Global Market Dynamics:
- US Retail Sales and USD Strength: Attention is shifting to US retail sales data, with expectations of modest growth. A weaker print could reduce the USD’s recent strength, as the market might interpret it as a sign of softer consumer demand, reinforcing the case for rate cuts. With 150bp worth of Fed rate cuts now priced in by the end of 2025 (down from 200bp previously), there’s potential for the USD to stabilize, creating space for the ZAR to strengthen further.
- ECB Policy Moves: The European Central Bank (ECB) is expected to reduce rates for the second consecutive time, driven by disinflationary pressures. A rate cut from the ECB would align it with global central banks’ easing policy, which could impact the EUR-ZAR pair. A weaker EUR would make the ZAR relatively more attractive, especially if South African inflation continues to decelerate.
FX Market Insights:
- ZAR Performance Against Major Currencies: The ZAR has held firm, particularly against the GBP and EUR, which have weakened due to softer inflation data and expectations of further monetary easing. On a trade-weighted basis, the ZAR’s strength should help keep inflation on a downward trajectory, supporting portfolio inflows into South Africa’s bond market.
- Technical Levels: USD-ZAR is consolidating below the 17.6750 resistance level, with support seen at 17.3500. Despite a resurgent USD, the ZAR has managed to maintain stability, indicating strong underlying demand from exporters and investor confidence in South Africa’s economic prospects.
Fixed Income Market:
- Bond Market Reaction: South Africa’s bond market has been under pressure due to the stronger retail sales figures, which have reduced expectations of aggressive rate cuts. However, the long-term outlook remains positive as inflation continues to fall, giving the SARB room to reduce rates gradually. Foreign inflows into the bond market, supported by the ZAR’s resilience and attractive yields, are helping stabilize the market.
- Global Bond Trends: Globally, bond markets are reacting to disinflationary trends, particularly in the Eurozone and the UK. With inflation falling below 2.0%, both the ECB and BoE are expected to ease monetary policy further. This global shift toward lower rates could support South African bonds in the coming months as foreign investors search for higher yields in relatively stable markets like South Africa.
Outlook for the ZAR:
- The ZAR’s resilience against the USD reflects both domestic improvements and global disinflationary trends. If US retail sales data softens, the ZAR could gain further ground, especially as the Fed slows its rate-cut cycle. Similarly, continued easing by the ECB and BoE would support a stronger ZAR against the EUR and GBP.
- With the MTBPS (Medium-Term Budget Policy Statement) and upcoming SARB rate cuts, the ZAR’s outlook remains cautiously optimistic. The combination of fiscal reforms, easing inflation, and rate cuts should keep investor sentiment positive, supporting further ZAR gains in the near term.
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