1. South Africa’s Geopolitical Alignment:
- Ramaphosa’s Visit to Russia: President Ramaphosa’s remarks during his visit to the BRICs+ summit, where he described Russia as a “valued ally and friend,” underscore South Africa’s geopolitical pivot towards the BRICs alliance. This realignment may have long-term consequences, particularly concerning SA’s relationship with the West, especially if Donald Trump wins the next US election. Trump’s presidency could lead to the withdrawal of trade benefits like AGOA, pushing SA even further into BRICs’ economic orbit.
- Shift Away from USD: The BRICs nations’ push to reduce reliance on the USD is another critical development. While the journey towards a BRICs currency or lessened USD dependency will take time, it signals a broader effort to rebalance global economic influence. For SA, this strategy could be both an opportunity and a challenge, depending on how successfully it navigates its relations with both the BRICs and Western countries.
2. Domestic Inflation and SARB Outlook:
- Inflation Expectations: The latest CPI data release is highly anticipated, with expectations that inflation will slow further to 3.8% y/y in September, down from 4.4% in August. This would be driven by lower fuel prices and a stronger ZAR. A lower-than-expected CPI reading could open the door for further SARB rate cuts, and there is growing speculation that the inflation target could be adjusted to a lower level.
- Rate Cuts: The SARB is broadly expected to cut rates by 25bp in November, and the ongoing ZAR strength could increase the probability of additional cuts in 2024 and 2025. Investors have priced out a fourth rate cut, leaving three 25bp cuts in the outlook. The focus now shifts to how inflation data and SARB policy evolve in the coming months.
3. ZAR’s Strong Trade-Weighted Performance:
- Impressive FX Performance: The ZAR has held strong against the USD, breaking below key levels of GBP 23.00 and EUR 19.00, reflecting significant resilience on a trade-weighted basis. This has helped reduce imported inflationary pressures, which is critical for maintaining a favorable inflation outlook.
- Gold Price Rally: The gold price continues to rise, reaching $2,733.4/oz, providing support for SA’s terms of trade. This further bolsters the ZAR’s outlook, as South Africa benefits from being a major gold producer, with higher gold prices underpinning currency stability.
4. Global Context and Risks:
- IMF and Global Growth: While the IMF raised South Africa’s growth forecast, it also warned of potential downward revisions to global growth, especially with challenges in China’s property sector. This highlights the dual risks that SA faces: benefiting from local economic reforms and a stronger ZAR, but being exposed to potential global slowdowns that could impact trade and investment flows.
- US Dollar Dynamics: The USD remains near a 2.5-month high as markets expect the Federal Reserve to adopt a more measured approach to easing monetary policy. This supports a strong USD in the near term, but any signs of slower economic data in the US could trigger a reversal, offering further upside potential for the ZAR.
5. Bond and Fixed Income Market Insights:
- Bond Market Consolidation: Domestic bond markets have shown strength, even as US Treasury yields rise. SA bond yields have not followed US yields to the same extent, leading to a compression in the yield spread, which should continue to attract portfolio inflows into SA bonds. This dynamic supports the ZAR, as South Africa’s bond market remains attractive to foreign investors.
- Rate Cut Outlook: The FRA curve suggests that while a 25bp rate cut in November is highly anticipated, the market is now more conservative about further cuts. A total of three 25bp cuts is expected by the end of 2025, down from four, as the SARB maintains a cautious stance.
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