Implications for SA markets
FRA
Given market pricing ahead of the decision, it is not surprising to see some payer interest across the FRA curve following the 25bp cut. However, the professional market is still pricing in quite a sharp cutting cycle, with the 12×15 tenor, for instance, at 6.830%, suggesting at least four more rate cuts to come over the next year. Looking at the near term, the 3×6 tenor, which covers the November MPC meeting, still has a chance of a 50bp rate cut priced in as inflation is expected to slow even further in the coming months, widening the real rate spread. At current levels, value can likely be found paying short-end rates but receiving longer-dated tenors, given the cautious stance of the SARB now, but the potential for the cutting cycle to run a bit longer than what is currently expected.
IRS
Despite a unanimous decision to reduce the repo rate, swap rates have broadly risen after the SARB meeting, with more pronounced increases at the short end of the curve. The uptick in swap rates likely indicates that markets expected the SARB to be more dovish than what they were. Illustrative of the SARB’s more hawkish stance is the fact that the repo rate forecast for the end of the year was revised upward to 7.86% from 7.65% previously. Still, the central bank expects inflation to average at 4.6% y/y in 2024, down from 4.9% y/y previously, and policymakers could become more dovish, barring any inflationary shocks.
Bonds
A flattening bias in the SAGB curve was evident following Governor Kganyago’s 25bp rate cut announcement. Tenors at the front end were relatively muted, suggesting that the decision had been fully priced in, while, further along the curve, tenors were richer. Further downward revisions in the inflation forecasts for the monetary policy horizon, alongside the relatively weak economic growth environment and stronger ZAR prospects, bolstered the attractiveness of longer-dated bonds. Moreover, the shift to the dovish monetary policy cycle by major DM central banks and a QPM model, which is pencilling in the scope for more rate cuts in 2025 and 2026, signal that the bull run in domestic bonds could persist. With crucial central bank meetings in the rearview, emphasis will placed on the upcoming medium-term budget presentation in October to gain insight into the domestic reforms that the GNU government plans to implement to improve South Africa’s fiscus, which remains a key headwind for the SAGBs and ZAR.
ZAR
Initially, the rand gained as much as 1.05% ahead of the SARB’s September MPC meeting on Thursday, breaking below the key R17.5000/$ handle for the first time since February 2023. These moves were supported by a weaker dollar after the US Fed delivered an outsized 50bp reduction at its September FOMC meeting just hours before the SARB announcement. However, the rand has struggled to hold onto earlier gains after the meeting. This was a sign that the move was largely priced in already. Looking ahead, increasing Fed rate cut expectations will continue to exert selling pressure on the greenback, bullish for the ZAR. Meanwhile, SARB Governor Lesetja Kganyago’s comments suggesting the central bank is not behind the curve on rate cuts eased prospects for more aggressive SARB rate cuts, which should cap potential ZAR losses.
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