Fed Chairman Powell testified before the Senate Banking Committee yesterday and is set to deliver the same message to the House Financial Services Committee today. His remarks provided no major surprises, as he refrained from commenting on trade and tariff policies but emphasised that the FOMC would adjust its stance if inflation conditions warranted it. Powell reiterated the strength of the US economy, signalling no immediate urgency for rate cuts unless inflation or employment deteriorates. His comments contributed to rising US Treasury yields, as markets reassessed the Fed’s rate-cut outlook. Given how mature the business cycle is, The Fed is closely monitoring inflation and labour market trends, especially amid uncertainties stemming from the Trump administration’s policy shifts on tariffs, immigration, regulations, and fiscal policy. Until there is greater clarity on these factors, the Fed will likely proceed cautiously, relying on economic data that, for now, remains strong.
Looking at local data, manufacturing production contracted by 1.2% y/y in December, showing a slight improvement from November’s revised decline of 1.9% y/y. Notably, December’s figure outperformed Bloomberg’s consensus estimate, which had projected a steeper contraction of 1.7% y/y. For the full year, manufacturing production fell by 0.4% y/y in 2024, weighed down by sharp declines in motor vehicles & parts (-13.3% y/y) and basic iron & steel (-2.9% y/y). This data underscores the ongoing de-industrialisation of the South African economy. Looking ahead, the manufacturing sector faces continued challenges. January’s Absa Purchasing Managers’ Index (PMI) came in at 45.3, remaining below the critical 50-point threshold and signalling a bleak outlook for the industry. Adding to the pressure, escalating tensions between South Africa and the US, along with recent US import tariffs on steel and aluminium, could further strain the sector.
ZAR Markets
The USD-ZAR is drifting higher this morning, trading back above 18.5000 once again. US Treasury yields have risen in response to Fed Chairman Powell’s testimony in Congress, providing some support to the dollar more broadly. Also note that gold prices have continued to perform exceptionally well, driven by sustained central bank purchases and concerns over potential tariffs. This artificially elevated demand is supporting South Africa’s terms of trade, which have recently improved to levels historically associated with strong currency appreciation. The ZAR has mirrored these improved trade dynamics, demonstrating notable resilience in recent weeks.
Global FX Markets
The foreign exchange markets were pretty slow yesterday although the dollar did weaken as the Trump trades start to misfire, with no tier-one data to drive the price action. The only bit of macro event risk came in the form of Fed Chair Powell’s testimony. Powell stated that the economy remains strong, with a 4% unemployment rate near full employment and inflation lower but still above target. He emphasised a cautious approach to policy changes, warning against easing too quickly, which could slow inflation progress. Powell also briefly acknowledged economic uncertainties, including potential risks from new import taxes, immigration policies, and regulatory reforms under the Trump administration. The single currency is holding onto yesterday’s gains in Asia this morning, with yesterday’s high at EUR/USD1.0380 the first target for euro bulls this morning. There is no tier-one data out of the eurozone this morning, which leaves the market to focus on the release of US CPI this afternoon. Expect a measured trading session this morning ahead of the key US data. Market talk suggests that cable is having a busy start to the day on the matching platforms with good interest to trade following yesterday’s gains. Hawkish BoE speak drove the gains yesterday with Catherine Mann stating that her vote of a 50 bp cut at the late meeting does not mean she wants a series of rate cuts to follow. Bank of Japan Governor Kazuo Ueda stated that the central bank will maintain its monetary policy to achieve a stable and sustainable 2% inflation target. He made the remarks in parliament when asked about exiting the BOJ’s stimulus policy. Meanwhile, we have seen the USD/JPY play catch up this morning with the pair rising above USD/JPY153.50 as stops to the topside were taken out. Yen longs bailed as higher US Treasury yields and importer demand placed them under pressure this morning.