Currency: Despite some volatile market swings around Donald Trump’s US election victory this week, little has changed in terms of broader valuation. On a trade-weighted basis, the USD remains overvalued, and the ZAR is still trading close to fair value. A USD correction may not be imminent, however, with uncertainty over the extent to which Trump will implement his touted policy plans likely to keep the dollar propped up for a while longer even as the Fed continues to cut rates. That being said, the ZAR remains poised to capitalise on an eventual dollar correction, even if it might be shallower than previously anticipated. High interest rates in SA, coupled with improving sentiment surrounding the GNU’s reform narrative, make the ZAR a prime candidate for capital chasing higher yields.
Inflation: Headline CPI slowed to +3.8% y/y in September from +4.1% y/y in August, its lowest reading since March 2021. Fuel deflation is driving the slowdown in the headline print while inflation in many other CPI categories seems to be bottoming out. Looking forward, falling fuel inflation and a stronger ZAR will likely continue to feed through to a lower headline CPI outcome for October. However, this effect could well lose momentum in November due to statistical base effects. Risks to current lower CPI readings include higher oil prices due to Middle Eastern conflicts, further increases in services inflation, and the risk of ZAR depreciation.
Repo rate: An ongoing slowdown in inflation cements the case for another SARB rate cut at its upcoming November meeting, especially following the US Fed’s decision to cut interest rates by 25bp this week. SARB Governor Kganyago’s push for an inflation target more in line with global standards and closer to the current lower band of 3% supports the likelihood of a 0.25% cut rather than a greater cut of 0.50% this month.
Government Finances: The October MTBPS brought no surprises, painting a fairly sobering view of SA’s economic and debt trajectories. There were positives including increased infrastructure spending and gross fixed capital formation, and the promise of no more SOE bailouts. However, there were negatives to balance this out, with low overall economic growth predicted over the forecast horizon, while debt levels are still expected to rise further before eventually stabilising. Difficult choices need to be made by the GNU to set the country on a path to more prudent fiscal path which would contribute to the ZAR’s resilience.
GDP Growth: The SA economy expanded marginally in Q2, as year-on-year GDP growth came in at 0.3% y/y in Q2, lower than an already disappointing 0.5% y/y in Q1. Interest rates remained high, and confidence weak in the run-up to the general election at the end of May even though there was no load-shedding. The Q3 GDP print may improve as confidence has increased following the formation of a more centrist GNU.
Offshore conditions: Offshore market conditions are extremely volatile at the moment. There is plenty of uncertainty around the outlook for prospective economic policy in the US following Donald Trump’s US election victory. Trump’s previous stint in the White House showed that he is a very pragmatic leader, meaning it is difficult to make predictions about the coming four years with any confidence. That being said, a Trump presidency does promise plenty of market volatility, although it should be noted that his propensity to speak in hyperboles means policy outcomes will almost always be less extreme than initially touted.
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