Daily Market Report 26 Feb

Daily Market Report 26 Feb

ZAR Holds Ground Amid USD Weakness and Domestic Policy Concerns

Key Developments

  • South Africa:
    • Budget Uncertainty Persists: VAT hike discussions face pushback from SARB Governor Kganyago.
    • Economic Indicators: SARB’s leading indicator dips 1.8% m/m, reflecting slow structural reform progress.
    • Domestic Inflation Data on Watch: CPI expected at 3.2% y/y, with fuel price increases a concern.
  • Global:
    • US Consumer Confidence Plummets: Sharpest drop in 3.5 years, reflecting inflation fears.
    • Trump’s Trade War Risks: Tariff plans spark counter-retaliation threats, worsening stagflation concerns.
    • US Treasury Yields Slide: 10-year UST falls to 4.31%, as market bets on 50bp of Fed rate cuts.

Market Insight – FX

  • ZAR Performance:
    • Spot: 18.4150 | Range: 18.2650 – 18.6350
    • Key Drivers:
      • USD Weakness Persists: Fed policy uncertainty and rate cut pricing weigh on the greenback.
      • Rising Gold Prices: Safe-haven demand buoys gold, improving SA’s terms of trade.
      • SARB Pushback on VAT Hike: A fiscal shock could delay monetary easing, impacting ZAR sentiment.
    • Risks:
      • Budget Negotiations Continue: Uncertainty lingers on tax policy and spending.
      • Inflation Data Key: Any upside surprise could influence rate cut expectations.
  • Global FX Trends:
    • USD Index: 106.80, struggling as US data weakens.
    • EUR/USD: Holding above 1.0500, but German election results add policy uncertainty.
    • GBP/USD: 1.2690, struggling to break 1.2700 amid UK rate cut speculation.
    • USD/JPY: Testing 149.00, with selling pressure building on BoJ tightening bets.

Market Insight – Fixed Income

  • US Treasuries & Global Bonds:
    • UST Yields Decline: 10-year yield at 4.31%, as Fed rate cut bets increase to 50bp for 2025.
    • Market Sees US Economic Weakness: Business uncertainty and tariff risks dampen risk appetite.
  • SA Bonds & FRAs:
    • Foreign Investor Sentiment:
      • Uncertainty over the budget’s fiscal stance keeps bond investors cautious.
      • However, a stable ZAR and improving terms of trade offer some yield appeal.
    • FRAs Reflect a Conservative Outlook:
      • 3X6 FRA: 14bp cut priced in.
      • 6X9 FRA: 20bp cut, reflecting moderate easing expectations.
      • 9X12 FRA: 26bp cut, suggesting longer rate stability.

Outlook:

  • ZAR Could Strengthen Further If:
    • Fiscal Policy Becomes Clearer: A sustainable budget with reduced wasteful spending would boost sentiment.
    • USD Weakness Extends: Rising US stagflation fears and Fed dovish rhetoric could support EM currencies.
    • Gold Prices Stay Elevated: Continued safe-haven demand would improve SA’s external balances.
  • Key Levels to Watch:
    • Support: 18.3000, break below opens path to 18.0000.
    • Resistance: 18.6350, uncertainty caps further gains.

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