Daily Market Report 27 Feb

Daily Market Report 27 Feb

ZAR Faces Pressure, but USD Weakness Still a Longer-Term Risk

Key Developments

  • South Africa:
    • Inflation Edges Higher: January CPI rises to 3.2% y/y (from 3.0% y/y in Dec), but remains at the lower end of SARB’s target range.
    • VAT Hike Debate Intensifies: SARS boss Kieswetter warns against lifting VAT, arguing that stronger tax collection and reduced wasteful expenditure are better alternatives.
    • Energy Investment Surges: Over R200bn invested into power generation since 2019, but load shedding persists due to Eskom’s aggressive maintenance strategy.
  • Global:
    • US Tariff Threats on EU: Trump escalates trade tensions, proposing 25% tariffs on EU goods, which could trigger retaliatory action and impact USD dynamics.
    • US Treasury Yields Fall: The 10-year yield is down to 4.28%, as concerns mount over weakening US economic data.
    • Fed’s Quantitative Tightening May Ease: Speculation grows that the Fed will pause QT to avoid exacerbating economic slowdown risks.

Market Insight – FX

  • ZAR Performance:
    • Spot: 18.4700 | Range: 18.2650 – 18.6350
    • Key Drivers:
      • Tariff Fears & USD Resilience: The USD is firming slightly on positioning ahead of key US data, including Q4 GDP and PCE inflation.
      • South African Inflation Still Contained: While CPI ticked higher, inflation remains within SARB’s comfort zone, giving room for potential rate cuts later in 2025.
      • Budget Uncertainty Weighs: Investors remain cautious ahead of the March 12 budget announcement, as VAT hike concerns persist.
    • Risks:
      • US Data Releases Could Boost USD: If GDP and PCE inflation surprise to the upside, the USD could extend its recent gains, pressuring EM currencies like the ZAR.
      • Potential EU Retaliation on US Tariffs: If the EU responds with counter-tariffs, market volatility could rise, supporting safe-haven demand for the USD.
  • Global FX Trends:
    • USD Index: Holding steady at 106.60, with markets awaiting key data.
    • EUR/USD: 1.0480, as traders reduce long positions ahead of US data.
    • GBP/USD: 1.2655, consolidating below 1.2700 as BoE policy remains uncertain.
    • USD/JPY: 150.95, with key resistance at 152.00 as traders assess Fed rate cut probabilities.

Market Insight – Fixed Income

  • US Treasuries & Global Bonds:
    • UST Yields Hold Decline: The 10-year yield fell to 4.28%, marking a 50bp drop in a month, signaling slower US growth expectations.
    • QT Policy in Focus: Some Fed officials suggest slowing or pausing QT, which could further support US bonds and weaken the USD.
  • SA Bonds & FRAs:
    • Foreign Investor Sentiment:
      • Focus on the budget: If VAT hikes are avoided and fiscal consolidation is prioritized, SA bonds could rally.
      • US Treasury movements will be key: Lower UST yields improve SA’s attractiveness, easing fiscal pressures.
    • FRAs Reflect a Conservative Outlook:
      • 3X6 FRA: 15bp cut priced in.
      • 6X9 FRA: 22bp cut, suggesting moderate easing expectations.
      • 9X12 FRA: 26bp cut, indicating longer rate stability.

Outlook:

  • ZAR Could Strengthen If:
    • US Data Disappoints: A weaker GDP print or lower-than-expected PCE inflation would boost rate cut expectations and weaken the USD.
    • Budget Avoids Tax Hikes: A fiscally responsible budget could improve sentiment toward SA assets.
    • Fed Signals a QT Pause: If quantitative tightening slows, liquidity conditions improve, pressuring the USD lower.
  • Key Levels to Watch:
    • Support: 18.3000, with a break below targeting 18.0000.
    • Resistance: 18.6350, with upside capped by tariff fears and US economic concerns.

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.