2 Dec

Daily Market Report 2 Dec

 

ZAR Weakness from Trump’s Tariff Threats Likely to be Short-Lived

 

Talking Points

  • SA: Trump warns of 100% tariffs on BRICs+ nations allegedly undermining the USD.
  • SA: Commercial real estate value reaches R1.92 trillion, up 48% since 2015.
  • SA: Q3 GDP data in focus later this week.
  • CH: Caixin November manufacturing PMI rises to a five-month high, easing concerns about China’s slowdown.

Domestic Developments: Trump and Local Economic Trends

Trump’s Tariff Threats and the USD’s Role

President-elect Trump issued a tweet over the weekend threatening 100% tariffs on BRICs+ countries he accuses of trying to undermine the USD. While it underscores Trump’s protectionist stance, the threat appears more symbolic than substantive.

  1. Global Trade Dominance of the USD:

    • The USD facilitates 88% of global trade transactions (BIS 2022), with commodities priced in USD.
    • Even with a potential BRICs+ digital currency, the liquidity, trust, and widespread adoption of the USD would remain unparalleled.

  2. Challenges for a BRICs+ Currency:

    • A hypothetical BRICs+ currency would need significant trade deficits to create global liquidity, invoking Triffen’s dilemma.
    • Backing the currency with real assets (e.g., oil or gold) may add appeal but would not challenge USD hegemony.

Q3 GDP Expectations and Real Estate Growth

  1. Real Estate Sector Strength:

    • The commercial real estate market surged to R1.92 trillion, a 48% increase from 2015.
    • This growth reflects increasing investor confidence and a gradual recovery in key economic sectors.

  2. GDP Focus:

    • Q3 GDP data due this week is expected to offer deeper insight into SA’s economic trajectory post-GNU formation.
    • A continuation of improved business conditions and stable consumption would align with recent positive data trends.

Market Insight – FX

ZAR Outlook

  • Short-Lived Weakness:

    • ZAR depreciation triggered by Trump’s tweet is likely to fade as markets discount the practical challenges of executing such tariffs.
    • The BRICs+ currency narrative lacks immediacy, and USD dominance will remain intact for the foreseeable future.

  • Technical Levels:

    • Support: 17.9550 (38.2% Fibonacci retrace) offers immediate downside protection.
    • Resistance: Upside remains capped at 18.2650.

  • Key Drivers:

    • The ZAR’s performance this week will hinge on Q3 GDP data and global risk sentiment.
    • USD dynamics will remain a significant influence, especially amid concerns over Trump’s policies.

Global Context: Dollar Strength and Tariff Fears

USD Dynamics

  1. Tariff Uncertainty:

    • Trump’s threats to impose 100% tariffs on China, Canada, and Mexico have spurred USD demand, particularly through call options against impacted currencies.
    • However, Scott Bessent’s nomination as Treasury Secretary has calmed fiscal fears, limiting runaway USD gains.

  2. FX Market Trends:

    • EUR/USD: The pair hovers near 1.0525, pressured by weak European political sentiment and German labor strikes.
    • USD/JPY: Poised for further declines as Japan-US rate differentials narrow, with USD/JPY testing support at 150.00.
    • GBP/USD: Sterling slipped below 1.2700, driven by negative sentiment from both UK and Eurozone political uncertainty.

China’s PMI Recovery

China’s Caixin November manufacturing PMI rose to a five-month high, providing relief from recent economic slowdown fears. This development is supportive for commodity-linked currencies, including the ZAR, but broader USD strength tempers gains.

Market Insight – Fixed Income

SA Bond Market Trends

  1. Improved Conditions:

    • The recent decline in US Treasury yields and softer-than-expected PPI data last week have supported SA bonds.
    • The R209 yield has moderated, reflecting optimism over moderating global inflation trends.

  2. Fiscal Challenges:

    • Year-to-date, the main budget deficit has widened to -R302.1bn, compared to -R293.0bn a year ago.
    • This underscores the urgent need for fiscal reforms, particularly with mounting SOE liabilities.

FRAs

  • Expectations Unchanged:
    • The 3X6 vs 3m JIBAR spread remains at -33bp, indicating another 25bps rate cut in January.
    • Longer-term spreads (6X9 and 9X12) suggest two additional cuts in H1 2025, though further cuts depend on ZAR stability and fiscal dynamics.

Strategic Insights

Near-Term Focus

  1. Domestic Data:

    • GDP growth data and government finance stats will shape ZAR dynamics this week.

  2. Global Risks:

    • Trump’s tariff threats, coupled with concerns over European political stability, will influence risk sentiment and USD trends.

  3. Inflation Dynamics:

    • Last week’s PPI deflation reinforces expectations of a continued CPI slowdown, supporting SARB’s rate-cutting trajectory.

Long-Term Outlook

  • Structural Reforms:
    • SA’s ability to navigate fiscal challenges and implement SOE reforms remains critical to sustaining investor confidence.
    • The ZAR will benefit from improved governance and economic growth potential.

 

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