Daily Market Report 2 May

Daily Market Report – 2 May 2025

 

South Africa: Budget, ZAR Sensitivity, and Trade Dynamics

1. Ramaphosa’s Support for Godongwana

The President’s continued backing of Finance Minister Godongwana amid the budget impasse sends a stabilising signal. With political pressure mounting ahead of the third budget attempt on May 21, Ramaphosa’s alignment suggests institutional continuity and an implicit endorsement of fiscal conservatism – a key support for ZAR stability.

2. ZAR Outlook: Budget & Undervaluation

The ZAR has been trading at a discount since the initial budget postponement. That premium has started unwinding as signs emerge that the Government of National Unity (GNU) can hold together. Still, more upside potential exists:

  • Budget Credibility: If the May 21 budget is credible—fiscally prudent without cutting key social expenditures—the ZAR could break below the 18.00/USD mark.

  • Technical Target: Spot currently at 18.45; key support is at 18.40 (Fibonacci retracement level), with further gains possible toward 18.00.

  • Carry Flows: High interest rates and balanced external accounts could drive additional ZAR inflows, especially with global risk-on sentiment.

3. Wasteful Spending & Fiscal Hole

With waste estimated at R100bn, trimming inefficiencies can fill the R75bn fiscal gap without aggressive austerity. This is critical because it would reinforce fiscal sustainability without dampening growth or social stability.

 

Economic Indicators: Credit & Trade

4. Credit Cycle Weakness

March’s private credit growth slowed to 3.5% y/y – a sign of muted domestic demand and corporate caution. This could:

  • Limit import growth, supporting the trade surplus.

  • Imply limited domestic inflation pressure—keeping rate cuts in play.

5. Trade Surplus Surprises on the Upside

  • March’s R24.8bn trade surplus beat expectations (R14.9bn) and rose from February (R19.9bn).

  • Exports outpaced imports – helped by commodity prices (esp. gold) and reduced oil import bills.

  • This surplus supports:

    • GDP growth

    • The ZAR

    • Ratings sentiment, as it offsets fiscal strain

 Global Trade & FX Dynamics

6. China–US Trade Talks

Signals from China that it may reopen trade negotiations with the US are constructive for global risk sentiment. Any easing of trade tensions could:

  • Stabilise global supply chains

  • Lower input costs

  • Increase EM risk appetite, benefiting currencies like ZAR

7. Trump Tariffs – Watch This Space

The potential reimposition or expansion of Trump-era tariffs poses downside risks. For SA:

  • The timing is lucky, with gold booming and oil prices easing, cushioning trade impacts.

  • Logistics bottlenecks (Transnet) still cap export responsiveness, limiting upside from favourable terms of trade.

 Fixed Income: Budget Deficit & FRA Market

8. Budget Deficit Insights

  • March posted a R13.1bn deficit, pushing FY24/25’s deficit to R336.7bn (~4.5% of GDP) – marginally better than expectations.

  • The GFECRA transfer helped fund operations and lower borrowing requirements, but is not a permanent solution.

  • Structural imbalances persist – fiscal reform is still needed.

9. FRA Pricing Points to Rate Cuts

  • FRAs have priced in 29–72bp of cuts over the coming year.

  • Realisation of these cuts will depend on:

    • ZAR strength

    • Inflation moderation

    • Global monetary policy easing

 Global FX Commentary

  • USD Resilience: Boosted by BOJ dovishness and strong US tech earnings, but fragile underneath due to valuation disconnect with equities.

  • EUR/USD & GBP/USD: Short-term weakness due to rebalancing and election sentiment, but structurally, GBP has outperformed, marking its best month since late 2023.

 Key Takeaways & Scenarios                                   

  • Credible Budget + Waste Cuts    

ZAR Implication – Strong ZAR rally, potential break below 18.00

  • GNU Fractures / Budget Gridlock     

ZAR Implication – Renewed ZAR depreciation, >18.75 likely

  • Gold stays high, oil stays low 

ZAR Implication –  Continued trade surplus, ZAR support

  • US Tariffs Expand Aggressively       

ZAR Implication – Negative trade impact; ZAR under pressure unless offset by domestic reforms 

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