The big news this morning is that National Treasury plans to scrap the proposed VAT hike that threatened to rupture the GNU coalition. The decision, hailed as a triumph for opposing parties both inside and outside the GNU, paves the way for a realignment of coalition values that will hopefully bolster its stability. It also compels fiscal authorities to pursue genuine reforms, focusing on curbing wasteful spending and addressing inefficiencies. This tougher path is essential to confront longstanding issues like accountability and capital misallocation. The urgency of these reforms is underscored by the IMF’s latest fiscal monitor, which warns that South Africa’s public debt will climb toward 88% by 2030 without stricter fiscal policies. IMF Economist Era Dabla noted that the current budget fails to stabilise debt as the National Treasury projected, signalling a worsening fiscal trajectory. This comes alongside a recent downward revision to South Africa’s growth forecast, emphasising the critical need for a comprehensive fiscal management overhaul.

Meanwhile, on the data front, South Africa’s CPI inflation slowed to multi-year lows of 2.7% y/y in March from 3.2% y/y in February, coming in well below market expectations. The decline in inflation was broad-based, with downward pressure coming from housing and utilities, food and non-alcoholic beverages, restaurants, and accommodation services. Fuel prices remained firmly deflationary, falling by 8.8% y/y, continuing their drag on headline inflation. Core inflation also softened, easing to 3.1% y/y from 3.4% y/y, indicating a general easing in underlying price pressures. The drop in inflation supports the case for additional interest rate cuts, offering some relief to consumers and potentially stimulating domestic demand. However, the SARB is expected to proceed cautiously, with global uncertainties, including ongoing US trade tensions, posing risks to the inflation outlook and exchange rate stability. Market expectations now point to one rate cut in 2025, with a high chance of a second. However, the spotlight will now fall on PPI data today, which could affect positioning in the sessions ahead.

ZAR Markets

After a strong advance on Tuesday, the ZAR consolidated with a slight bearish tilt yesterday. This was consistent with a broadly firmer USD, as markets cheered the Trump administration’s decision to back down from threats to fire Fed Chairman Powell and express optimism that a trade deal with China could be made. Moreover, the softer-than-expected local CPI data also didn’t help the ZAR, as markets added to positioning for SARB rate cuts that would lower SA’s carry attractiveness. This morning, however, the news that the VAT hike has been scrapped still needs to be priced in more completely, suggesting some scope for ZAR appreciation today. The development increases the chances that the GNU will hold together and hopefully implement much-needed growth and fiscal reforms in the coming months.

Global FX Markets

The U.S. dollar stabilised this morning after a rebound, driven by President Donald Trump retreating from threats to fire Federal Reserve Chair Jerome Powell and signalling a softer stance on China tariffs. The dollar rose to 143.25 yen from a low below 140 yen, supported by Treasury Secretary Scott Bessent’s comments ruling out a specific currency target and calling the U.S.-China trade embargo unsustainable, though he noted no unilateral tariff reductions. The dollar also recovered from a three-and-a-half-year low of EUR/USD1.1572, trading at EUR/USD1.1338. Market commentators note the dollar’s sensitivity to trade news, with risks tilted downward but no repeat of recent heavy selling expected. The EUR/USD could rise above $1.15 if Fed independence concerns resurface. The Australian dollar fell to AUD/USD0.6361, the New Zealand dollar held at NZD/USD0.5949, sterling steadied at GBP/USD1.3263, the Swiss franc at USD/CHF0.8290, and China’s yuan remained at USD/CHF7.29