Daily Market Report 24 Mar

Daily Market Report – 24 March 2025

ZAR Enters a Week of Reflection as Budget Debate Takes Centre Stage

Talking Points

  • SA: Budget debate in Parliament will dominate, with VAT, expenditure reform, and fiscal risk in sharp focus.
  • SA: DBSA to house a new rail and port investment division to boost infrastructure reform.
  • SA: Transnet’s privatisation prospects questioned amid ideological resistance.
  • Global: Focus shifts to US PCE data, while Ukraine conflict and tariff threats cloud global sentiment.

Market Insight – FX

ZAR: Cautious Trading Amid Budget Focus and Fiscal Uncertainty

  • Key Levels:
    • Spot: 18.2280
    • Range: 17.9700 / 18.2875
    • Support: 18.0350 (break level), with the 78.6% fibo retrace at 17.9700.
    • Resistance: Topside capped at 18.2875 for now.
  • Drivers:
    • Despite encouraging inflation data and a dovish SARB, uncertainty around fiscal policy continues to weigh on ZAR.
    • Strong opposition to VAT hikes, limited room for spending cuts, and broader fiscal consolidation challenges leave SA exposed to negative sentiment if the budget debate disappoints.
    • Globally, USD resilience is underpinned by short-covering, safe-haven flows, and the anticipation of potential inflation via Trump’s policy risks.
    • Over the medium term, fading US exceptionalism, slower growth, and eventual Fed cuts could favor emerging market currencies like the ZAR—provided SA executes key reforms.

Market Insight – Fixed Income

Bonds: Cautious Optimism Amid Yield Curve Flattening

  • Performance: SA yields drifted lower, realigning with US Treasury direction after last week’s dovish SARB messaging.
  • Key Themes:
    • While inflation supports further SARB easing, fiscal overhang remains a key risk premium in domestic bonds.
    • The fiscal debate this week will influence perceptions of sovereign risk, which directly affects ZAR-denominated debt demand.
    • Focus turns to Thursday’s PPI data, which, although less impactful post-CPI, will help shape inflation trajectory expectations and monetary policy outlook.

Forward Rate Agreements (FRAs):

  • Post-SARB, the FRA curve has re-priced to reflect a slightly more cautious outlook:
    • 3X6 FRA: Now pricing in 21bps of cuts.
    • 6X9 FRA: Stabilised at -30bps for Q3.
    • 9X12 FRA & 12X15 FRA: Both pricing in 32bps of easing, indicating a single additional rate cut expected through 2024.

Key Domestic Considerations

  1. Budget Debate:
    • Crucial to investor sentiment. A poor showing with insufficient cost reforms could spike fiscal risk and pressure the ZAR.
    • Investors are calling for more than just opposing VAT hikes—they want clear expenditure rationalization and governance improvements.
  2. Privatization and Infrastructure Reform:
    • DBSA’s new investment division is a promising step for port and rail reform.
    • Success will depend on real operational control for the private sector, not token participation.
    • Scepticism remains high given Transnet’s history and ideological rigidity.

Global Context

USD Outlook:

  • The Dollar Index posted a third consecutive gain, driven by hawkish Fed commentary and safe-haven bids tied to trade and geopolitical risks.
  • Markets await US February PCE data, with recent Fed communication suggesting a cautious path toward rate cuts.
  • Short-term strength in USD continues, but cracks are appearing as growth and inflation begin to weigh on long-term appeal.

Cross-Currency Themes:

  • EUR/USD: Slipping near the lower range (1.0796), with ECB dovish commentary and bund yields softening.
  • GBP/USD: Under pressure ahead of the UK budget, trading toward 200-DMA around 1.2790.
  • USD/JPY: Offers expected near 150.00 as Japan exporters look to cap gains.

Global Bonds:

  • US Treasuries:
    • Strongest weekly performance YTD (+0.5%) amid growth concerns and dovish Fed tilt.
    • Traders are now pricing 70bps in cuts by the end-2025, with peak expectations for two to three cuts.
    • The yield curve steepens as short-term yields fall faster than long-end.
    • The 2-year yield fell to 3.95%, while the 10-year sits near 4.24%.

Outlook for the Week

  • SA Budget Debate:
    • The market will scrutinize Parliament’s discussions for signs of fiscal discipline.
    • VAT, government size, and state expenditure in the spotlight.
    • A constructive debate could spur bond inflows and ZAR resilience.
  • PPI (Thursday):
    • Expected to remain subdued, any surprise acceleration may reignite inflation concerns and impact bond pricing.
  • Global:
    • US PCE (Friday): Key inflation gauge for the Fed.
    • Ukraine talks and tariff headlines to shape global risk appetite.

Conclusion

Markets are entering a phase of cautious reflection. The SARB has opened the door for easing, but all eyes now turn to fiscal governance. ZAR’s performance will depend less on global tides and more on whether domestic reforms and fiscal sustainability are credibly pursued. The stakes are rising for the National Treasury and the GNU to deliver a coherent, pro-growth policy response.

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