Deputy Finance Minister David Masondo delivered two pivotal statements yesterday, signalling positive developments for South Africa’s economic landscape. He expressed unwavering confidence that the third budget will secure full support from GNU coalition partners, following constructive engagements with the National Treasury. This assurance is a welcome relief for investors, who eagerly await the GNU’s strategy to address fiscal challenges. Expectations are high that the coalition will prioritise curbing wasteful expenditure, offsetting the need for a VAT increase. Such disciplined austerity would bolster sustainable fiscal policy without overburdening the private sector, earning strong approval from taxpayers who supported the coalition’s formation over single-party dominance.

Equally significant, Masondo announced forthcoming changes to the inflation targeting framework, a collaborative effort between the National Treasury and the SARB initiated in February 2024. The current framework targets consumer inflation between 3% and 6%, with a 4.5% midpoint preference. However, SARB Governor Lesetja Kganyago advocates for a single-point target of 3%, aligning with global peers to enable lower long-term interest rates. A lower target may necessitate tighter monetary policy initially, sustaining higher interest rates to anchor inflation expectations. This could enhance ZAR demand through attractive carry returns, with minimal disruption given current inflation levels. While rate cuts may be delayed, this approach strengthens South Africa’s appeal to capital in a volatile global market.

ZAR Markets

Deputy Finance Minister Masondo’s announcements that the GNU would pass the upcoming budget and that authorities were seriously considering changing the SARB’s inflation target triggered a strong response from the market yesterday. The rand appreciated to R18.0000/$ and may test a break into the 17’s today as it also capitalises on broader dollar weakness. The early-April market sell-off, driven by concerns over a potential GNU breakup, has now fully reversed. Investors are increasingly optimistic, lowering their risk perceptions of South Africa and anticipating narrower inflation gaps with trading partners.

Global FX Markets

The U.S. dollar weakened on Friday as U.S. Treasury yields fell, driven by weak economic data reinforcing expectations for Federal Reserve rate cuts in 2025. Despite early dollar strength from a U.S.-China trade truce, momentum faded, with currencies trading flat. The dollar dropped significantly against the South Korean won, falling 0.14% to 1,394.70, amid U.S.-South Korea talks. Speculation grew that President Trump favors a weaker dollar to influence trade negotiations, challenging Asian exporters’ currency dynamics.

Unexpected declines in U.S. producer and consumer prices fueled expectations for at least two Fed rate cuts, with markets pricing in 56 basis points by December. The euro rose 0.1% to $1.1197, the pound stabilized at $1.3309, and the dollar index fell 0.1% to 100.70, though it was set for a 0.3% weekly gain. Treasury yields declined, with the 10-year at 4.4413%. Fed Chair Jerome Powell emphasized inflation over employment in policy decisions, suggesting fewer rate cuts if inflation rises. The dollar fell 0.26% against the yen to 145.30, while Japan’s economy contracted. The Australian dollar rose to $0.6406, but the New Zealand dollar slipped to $0.5874