Daily Market Report 22 May

Daily Market Report – 22 May 2025

South Africa: Budget and Diplomacy Create a Neutral Market Response

Summary of Key Events

  1. Third Iteration of the Budget
    • Main Theme: Fiscal consolidation without a VAT hike.
    • Funding Gap Strategy: Recover R68bn of a R75bn shortfall through bracket creep, spending cuts on frontline services (health, education), and restrained social grant increases.
    • Debt/GDP: Expected to peak at just above 77%, under a lower GDP growth forecast of 1.4%.
    • Implication: This is not a growth-accelerating budget. Rather, it’s a stopgap aimed at satisfying rating agencies and global lenders with modest austerity.
  2. Ramaphosa’s Washington Visit
    • Tone: Started cordially, escalated when President Trump aired contentious footage and questioned racial policies and farm-related violence.
    • SA Response: Firm pushback, with the delegation emphasizing the coalition nature of SA’s current government and distancing the state from extremist rhetoric.
    • Outcome: Relations strained, but the ice has been broken, and diplomacy may now continue in more structured terms. Whether the U.S. will attend the G20 or lift trade sanctions remains unclear.
  3. Inflation Print
    • CPI (April): Ticked slightly higher to 2.8% y/y from 2.7%, but still below the SARB’s 3% lower bound.
    • Implication: Justifies the possibility of a rate cut later this year—perhaps not at May’s MPC, but potentially in Q3 if disinflation and ZAR stability persist.

Market Impact

ZAR Performance

  • Spot Level: 17.9600
  • Range: 17.8350 – 18.1000
  • Technical Note: Support at 17.8625 holding firm, suggesting a consolidation phase. No new directional catalysts yet.
  • Takeaway: Market priced in much of this week’s news. Optimism over the budget and diplomacy is now balanced by a healthy dose of realism and fatigue.

Bonds and FRA Curve

  • SAGBs: Stable performance despite a volatile backdrop. Sentiment buoyed by budget discipline and inflation control.
  • Spread Compression: R209 vs. US 10yr now at 619bp – a tight spread given US bond volatility.
  • FRA Market:
    • 2×5: –22bp
    • 3×6: 31bp of easing
    • 6×9: –39bp
    • 12×15: 42bp of cuts priced in
    • Outlook: Still only one cut clearly priced; second possible depending on inflation/ZAR.

Global Backdrop: U.S. Fiscal Woes Deepen

  • Treasury Auctions: The recent $16bn 20-year bond auction flopped, with yields spiking to 5.127%, triggering equity and dollar sell-offs.
  • Reason: Worries about Trump’s tax cut proposal adding $3.3–5.2 trillion to the fiscal deficit over the next decade.
  • USD Under Pressure: DXY under 99.50. EUR/USD supported; GBP steady; USD/JPY showing retracement.

Final Thoughts

  • ZAR Outlook: Pause expected short-term. ZAR has absorbed a lot of good news. Further gains will depend on evidence of real policy reform and sustained diplomatic progress.
  • Monetary Policy: Inflation trajectory still allows for easing. Look to SARB in May and again in Q3.
  • Global Risks: Watch US debt politics—next auction results, bond demand shifts, and any changes in Fed guidance amid rising fiscal stress.

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.