Daily Market Report – 7 May 2025

ZAR: Undervaluation Now Mostly Unwound

From R20 to R18.13 – The Big Recovery

The ZAR has strengthened dramatically over the past month—from around R20.00/USD to R18.13/USD, before bouncing modestly. That’s a nearly 10% gain, largely unwinding the “GNU risk premium” and ZAR undervaluation flagged earlier in the year.

Drivers of Appreciation

• Improved Risk Sentiment: China’s stimulus and thawing US-China trade talks.
• Commodity Prices: Gold strength, oil weakness = improved terms of trade.
• Carry Appeal: SA still offers one of the most attractive real yields globally.
• Technical Momentum: Pushed through Fibo levels, now nearing oversold territory.

ZAR Valuation Outlook

With undervaluation mostly absorbed, new gains will require fresh catalysts, especially from:

• A credible SA budget on May 21.
• Structural reform hints.
• A dovish or neutral Fed tone tonight.

Spot: 18.2150
Range: 18.13 – 18.45
Support sits near the 200-day moving average (~18.1800) with oversold indicators suggesting consolidation is likely.

India-Pakistan Conflict: A Potential Risk-Off Catalyst

“Operation Sindoor” – A High-Stakes Development

• India’s airstrikes on Pakistan signal a worrying escalation between two nuclear powers.
• Markets so far are cautiously watching, but airspace diversions and UN Security Council involvement raise concerns.

Potential Market Impact

If the conflict:

• Stays limited: Market impact contained.
• Escalates or spreads: Risk-off surge → USD strength, EM FX weakness, gold rally.

This geopolitical risk has not yet priced in materially, but it’s a growing wildcard that could swiftly reverse gains in EM assets, including the ZAR.

China Stimulates: Reverse Repos & RRR Cuts

Monetary Easing Package

• Reverse repo rate cut: 10bp to 1.4%
• Reserve requirement ratio cut: 50bp → ~$139bn in liquidity released

Strategic Goals

• Offset tariff shocks from the US
• Stimulate domestic demand for export substitution
• Revive a stalled credit cycle and avert deflation

Implications for SA

• Better Chinese demand helps SA commodities and exports
• Stimulus bolsters global trade and risk sentiment
• Aiding ZAR through both sentiment and terms of trade

FOMC Decision Later Today: What’s at Stake?

What to Expect

• Rates to hold at 4.50%
• Focus will be on:
  • Fed’s inflation outlook, especially post-tariffs
  • Commentary on quantitative tightening (QT)
  • Timing and scale of potential rate cuts

Market Pricing

• Currently prices in 75bp cuts by year-end
• If Powell adopts a hawkish hold, that pricing may adjust
• If he signals pause in QT, market may rally

A dovish tone could push ZAR below 18.13, while a hawkish surprise could test 18.45 resistance.

Fixed Income & Moody’s Downgrade

Moody’s Lowers GDP Forecast: 1.5%

This aligns with recent fiscal, political, and global trade challenges:

• Budget delays
• Trade headwinds
• Structural constraints (power, logistics, policy uncertainty)

Bond Market Reaction

• SA yields nudged higher early this week on rising US Treasury yields
• But gains may be capped due to:
  • Low growth
  • Diminished inflation pressure
  • ZAR stability

FRA Market Snapshot

The FRA curve still leans dovish, but not excessively so—reflecting a cautious optimism that SARB will pivot if fundamentals align.

Global Debt: Record Highs, Risks Building

• Global debt at $324 trillion (Q1 2025)
• EM debt: $106 trillion; record 245% of GDP
• China’s contribution: $2 trillion in Q1 alone
• Rising debt loads + weak global growth = pressure on fiscal sustainability, even in EMs

Implication for SA:

• Any misstep on fiscal reform will be punished swiftly by markets
• Fiscal credibility now non-negotiable for sustaining ZAR gains and containing yields

Final Thoughts

ZAR has staged an impressive comeback, but momentum may be fading as it approaches technical and valuation limits. Key events to watch:

• FOMC tonight
• India-Pakistan developments

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