1. Impact on South Africa and ZAR Performance:
- ZAR Stability: Despite a stronger USD, the ZAR has remained stable and even recovered against the EUR and GBP, which suggests that the ZAR is performing well on a trade-weighted basis. Investors have scaled back their expectations for SA rate cuts as well, reflecting a more conservative outlook in line with the global trend of moderating rate-cut expectations.
- Interest Rate Outlook: The moderation in FRA rates signals that while a 25bp rate cut in November is still expected, the probability of further consecutive cuts has declined. The market is now pricing in three 25bp cuts through 2025, down from four previously.
2. Global Developments:
- US Bond Yields: US Treasury yields have surged higher, with 10-year yields now trading above 4.21%, reflecting factors such as economic resilience, political uncertainty, and the Fed’s cautious stance on rate cuts. This rise in yields has influenced SA bond yields, keeping them attractive to foreign investors and supporting portfolio inflows into SA bonds.
- Gold and Oil Prices: The surge in the gold price to $2,733.4/oz is a positive development for South Africa’s terms of trade, especially as oil prices remain subdued. This strengthens the ZAR’s position, particularly given South Africa’s reliance on commodity exports.
3. Geopolitical Considerations:
- US-SA Relations under Trump: Should Trump win the US election, South Africa’s alignment with Russia and Palestine could lead to retaliatory actions by the US, such as removing trade benefits like those under the AGOA agreement. This would likely push South Africa further towards BRICs+, distancing it from Western trading partners. In the long term, this could reduce US influence in Southern Africa, strengthening SA’s ties with China and Russia.
4. Outlook for the ZAR and SA Bonds:
- ZAR Range: The USD-ZAR trades within a range of 17.35–17.8000, with resistance at 17.6750 and support at 17.3500. The ZAR has shown resilience despite the stronger USD, thanks to factors such as commodity prices and portfolio inflows.
- SA Bond Market: Domestic bond yields have risen in line with US Treasuries, maintaining the attractiveness of SA bonds. The spread between SA’s 10-year bonds and US Treasuries has consolidated around 514bp, and the SARB’s conservative stance could widen this spread further in the coming months.
5. Market Insight – Global Currencies:
- EUR and GBP: The EUR remains under pressure, trading near EUR/USD 1.0800, as the stronger USD and wider German-US yield spreads continue to weigh on the single currency. Similarly, the GBP is trading within a tight range, with attention on BoE speakers and their potential influence on market expectations for UK rate cuts.
- JPY: The yen has settled above USD/JPY 150.50, with exporter sales limiting further upside for the USD. However, the yen remains sensitive to Japanese intervention in the market, as policymakers aim to manage its volatility.
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