29 Nov

Daily Market Report 29 Nov

ZAR on the Defensive as Investors Digest Data and Trump Policy Risks

Daily Market Report 29 Nov Talking Points

  • SA: President Ramaphosa pushes to exempt more basic foodstuffs to alleviate household hardship.
  • SA: Joburg Water considers tighter water restrictions amid ongoing supply challenges.
  • SA: S&P upgrades Eskom’s credit rating outlook to positive, citing operational improvements.
  • RU: Russian authorities intervene to halt the RUB’s rapid depreciation.

Domestic Developments: Data and Policy Insights

PPI Data Surprises to the Downside

  1. October PPI Print:
    • Deflationary Turn: Producer price inflation fell to -0.7% y/y, down from +1.0% y/y in September and below expectations of -0.2% y/y.
    • Key Drivers:
      • Petrol prices dropped -22.2% y/y (Sep: -13.2%).
      • Diesel prices fell -26.9% y/y (Sep: -15.7%).
    • Implications:
      • Lower producer prices signal continued CPI moderation in the near term.
      • However, intermediate goods price growth has bottomed and begun an uptrend, suggesting limited further downside.

Upcoming Data Releases

  1. Credit Demand (October):

    • September Trends: Credit growth slowed to +4.6% y/y (Sep), down from +5.0% y/y (Aug), led by slower corporate credit demand. Household credit demand remained steady at +3.3% y/y.
    • October Expectations: Consensus expects an improvement to +4.8% y/y, reflecting early signs of rate-cut effects.

  2. Trade Balance:

    • Current Position: The trade balance has maintained an eight-month surplus streak, helping offset fiscal risks.
    • Outlook: Surplus expected to continue, though rising consumer and capital goods imports may narrow the margin.

  3. Government Finance Stats:

    • Deficit Position: Year-to-date main budget deficit widened slightly to -R256.0bn (vs. -R251.8bn a year ago).
    • Redemption Payments: Elevated at -R23.3bn YTD (vs. -R4.0bn in 2022).
    • Implications: Fiscal reforms remain critical to stabilising debt and maintaining investor confidence.

Market Insight – FX

ZAR Performance

  • Current Trends:

    • The ZAR appreciated yesterday, coinciding with the softer-than-expected PPI data.
    • However, much of the move was driven by a weaker USD index, influenced by unwinding of JPY carry trades.

  • Data Impact:

    • Today’s credit demand and government finance data could provide clearer insight into SA’s economic trajectory and fiscal risks, influencing medium-term ZAR dynamics.

  • Technical Levels:

    • Support: Immediate support at 17.9550 (38.2% Fibonacci retrace), with lower congestion likely restricting further downside.
    • Resistance: Upside capped at 18.2650, with this week’s high protecting against further gains.

  • Outlook:

    • ZAR’s resilience depends on domestic fiscal improvements and global risk sentiment, especially as markets digest Trump’s trade policies and CNY pressures.

Global Context: Mixed Signals from the Dollar and Trade Risks

Dollar Dynamics

  • Thanksgiving Pause:

    • US markets were closed yesterday, resulting in subdued dollar liquidity. The USD Index slipped below 106.00 this morning amid month-end flows.

  • Euro and Yen Movements:

    • EUR/USD consolidated around 1.0550, with limited upside due to hawkish ECB commentary.
    • USD/JPY tested 150.00 to the downside as markets anticipate a BoJ rate hike in December.

Trump’s Tariff Risks

  • Escalation Fears:
    • Trump’s tariff threats on China, Canada, and Mexico continue to weigh on risk sentiment, impacting commodity-linked currencies like the ZAR, AUD, and NZD.

European Instability

  • French Bond Pressures:
    • French yields held at 3.024%, with spreads over German Bunds settling at 85.7bps after spiking to 90bps on political instability.
    • Implications: Investor concerns over trade tensions and French fiscal health highlight broader Eurozone fragilities.

Market Insight – Fixed Income

SA Bonds

  • Performance Drivers:

    • Falling US Treasury yields, ZAR strength, and deflationary PPI data have supported the local bond market.
    • The yield curve shifted lower, reflecting improved inflation expectations.

  • Key Influences:

    • Today’s government finance stats and trade balance will provide more clarity on fiscal and economic risks.
    • ILB Auction: The release of the I2031, I2043, and I2058 bonds will shed light on investor sentiment and breakeven inflation expectations.

FRAs

  • Current Levels:
    • The 3X6 vs 3m JIBAR remains at -31bp, signalling another rate cut at the January MPC meeting.
    • The 6X9 spread to JIBAR widened slightly to -51bp, indicating another two cuts in H1 2025.
    • Longer-term spreads (e.g., 9X12) widened back to -61bp, reflecting cautious expectations for further easing.

Strategic Insights

Near-Term Focus

  1. Domestic Data:

    • Trade balance, government finance stats, and credit demand will offer critical insights into SA’s economic and fiscal health.

  2. Trump Tariff Implications:

    • Increased US-China trade tensions could weigh on global growth and commodity-linked currencies, including the ZAR.

  3. Inflation Dynamics:

    • The surprise deflation in PPI supports further CPI moderation, boosting expectations of additional SARB rate cuts.

Long-Term Outlook

  • Structural Reforms:

    • Fiscal discipline, SOE improvements, and alignment with IMF recommendations (e.g., debt ceilings) remain essential for sustained ZAR strength.

  • Global Risks:

    • Trump’s trade policies, CNY pressures, and Eurozone instability pose downside risks to EM currencies and global markets.

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