1. Domestic Inflation and SARB Rate Outlook:
- CPI Data: South Africa’s September CPI came in at 3.8% y/y, in line with expectations and extending the trend of disinflation for the seventh consecutive month. This is the lowest inflation reading since March 2021, driven primarily by lower fuel prices. However, with fuel inflation likely to bottom out soon, there may be a slowdown in the pace of disinflation, potentially leading to an uptick in CPI towards the end of the year.
- SARB Rate Cut Prospects: While inflation continues to fall, the ZAR’s recent depreciation and moderating Fed rate cut expectations may limit the scope for aggressive rate cuts by the SARB. The most likely scenario for the SARB’s next meeting in November is a 25bp rate cut, rather than a larger 50bp cut. SARB Governor Kganyago’s push for a lower inflation target may also play a role in tempering rate-cut expectations.
2. ZAR Depreciation and Market Volatility:
- Sharp ZAR Depreciation: The ZAR’s dramatic intra-day sell-off over the past two trading sessions erased all of its recent gains, making it one of the worst performers against the USD. Much of this can be attributed to broader market dynamics, including shifting expectations regarding US rate cuts, increased US Treasury yields, and risk aversion in global markets.
- US Influence: The USD rally is driven by expectations that the Fed will adopt a slower pace of rate cuts, as well as the uncertainty surrounding the upcoming US election. Market sentiment is increasingly cautious, and risk appetite has dipped, which has led to a pullback in emerging market currencies like the ZAR.
- Corporate Influence: There are reports that a substantial corporate order had helped keep the ZAR resilient earlier, but with that order now cleared, the market has shifted focus back to fundamentals, leading to a catch-up move in the ZAR’s performance, aligned with other currencies that had already depreciated against the USD.
3. Global Factors and US Election Concerns:
- Tighter US Election Race: Polls between Trump and Harris are tightening, adding further uncertainty to the market. A Trump presidency could trigger changes in trade policy, particularly impacting South Africa’s AGOA trade benefits, and could result in a more nationalist US stance that may hurt emerging market currencies.
- Fed Rate Cut Expectations: Market expectations for US rate cuts have moderated, with Fed funds futures now pricing in two 25bp cuts between the next three meetings, down from earlier projections of more aggressive cuts. This shift towards a more conservative Fed stance has boosted the USD, while US Treasury yields have also risen, further driving the ZAR’s weakness.
4. Bond Market Insights:
- Domestic Bonds Under Pressure: The ZAR’s depreciation has triggered an increase in SA bond yields, driven by both higher US Treasury yields and outflows from the SA bond market. This has unwound much of the gains achieved earlier in the year, and the spread between SA and US bonds has widened.
- Municipal and Fiscal Risks: South Africa’s fiscal situation remains challenging, with municipal mismanagement and infrastructure failures adding to the country’s risks. Despite signs of fiscal consolidation, the IMF has highlighted concerns about off-balance-sheet risks and the need for further reforms to stabilize South Africa’s fiscal outlook.
5. FX Market Insight – ZAR Outlook:
- ZAR Performance: The ZAR is currently trading around 17.7800, with resistance at 17.6750 and 17.8000 representing significant levels that could be difficult to break. The next support level lies around 17.3500, which should provide some downside protection in the near term.
- Risk Appetite: The ZAR’s resilience is heavily dependent on global risk appetite and investor sentiment. With USD strength and rising US yields, the ZAR is under pressure, and this may continue until there is greater clarity on both Fed policy and the US election outcome.
6. Global Insights:
- USD Strength: The US dollar index remains near a three-month high, driven by expectations of slower Fed rate cuts and uncertainty surrounding the US election. This is putting pressure on other major currencies like the EUR and GBP, and contributing to a broader risk-off environment.
- Global Bond Markets: US Treasury yields have surged, with the 10-year yield now above 4.21%. This has put upward pressure on global bond yields, including in the Eurozone, where policymakers are now discussing the possibility of deeper rate cuts to stimulate the economy.
|
