A busy week lies ahead for SA-exposed investors, who will have official Q4 unemployment numbers (Tuesday), consumer inflation stats (Wednesday), retail sales data (Wednesday), and National Treasury’s annual budget presentation (Wednesday) to navigate. Given the precarious state of state finances in SA, the budget speech will be the week’s main market mover. Minister Godongwana will need to balance spending pressures with past commitment to stabilise state finances, while ideally also addressing the inefficiency of state expenditure.

Fiscal slippage has become the general trend in SA, and the authorities no longer have many options left to explore. The last remaining option was exhausted when the GFECRA funds were earmarked to help pay down some of the government’s debt. Nevertheless, pressure on Minister Godongwana to throw more money at failing SOEs and bankrupt municipalities will be immense. All the while, SA remains on an unsustainable fiscal trajectory even without any new spending pledges. Without expenditure cuts, debt levels will continue to rise and likely peak above National Treasury’s forecast of 75.5% of GDP in 2025/26.

There is, however, little appetite for expenditure cuts, with potential tax increases being reported. These would need to be handled very delicately given that SA’s small tax base is already stretched, with any additional taxes likely to weigh on economic growth (and reduce future tax revenues). Ultimately, expenditure cuts and growth-enhancing reforms are needed to achieve sustainable fiscal consolidation, although this is unlikely to be presented come Wednesday.

ZAR Markets

The trade-weighted USD index (DXY) has fallen to its weakest levels since mid-December, giving the ZAR some reprieve. A weak US retail sales print on Friday was the latest catalyst for dollar sellers to take control of the market, with President Trump’s tariff threats holding limited sway over the dollar at the moment as it appears investors have taken on a wait-and-see approach given how much risk is already priced in. The USD-ZAR therefore starts the week near the floor of its recent trading range just north of 18.3000, although it will likely require a strong catalyst to break below that level. Accordingly, the pair may consolidate or even drift higher today, with the rest of the week’s performance hinging on the contents of Finance Minister Godongwana’s budget speech on Wednesday.

Global FX Markets

The dollar continued its decline on Friday with the USD Index hitting an intra-day low of 106.56 before closing at 106.79.  The move in the dollar was driven by a collapse in US Treasury yields after the release of the retail sales data which fell by the most in nearly two years. US Retail Sales showed a drop of 0.9% month on month as much of the country was blanketed by snowstorms and freezing conditions. This morning, we have the index marked at 106.60 going into the EU open. The euro reached a 14-session high against the dollar on Friday, equaling January’s peak, as optimism grew over potential Ukraine peace talks and a narrowing monetary policy gap between the ECB and the Fed. Reports suggest the U.S. is increasing pressure for a peace agreement in Ukraine is also boosting the euro. Meanwhile, the dollar weakened after U.S. retail sales data fell far below expectations, reducing U.S. bond yields and narrowing the yield gap with Germany. This shift in rate expectations, alongside technical indicators, reinforces bullish momentum for EUR/USD at the start of the week. The British pound reached its highest level against the dollar this year, supported by unexpectedly positive UK GDP data and a weaker dollar. The pound closed the week at GBP/USD1.2585 after data showed the UK economy grew by 0.1% in the final quarter of last year, improving sentiment despite ongoing economic challenges such as flat growth, high inflation, and elevated mortgage rates. Additionally, the pound benefited from dollar weakness as traders welcomed the delay in U.S. reciprocal tariffs and a producer price report that eased inflation concerns. The yen continues to strengthen at the start of the week with a firm close below USD/JPY151.00 now the target for yen bulls as the week gets underway. Sell the upticks for now.