Rand under pressure as US-South Africa tensions ramp up

South African markets got off to a rocky start this week after President Donald Trump froze all US aid to South Africa over what he falsely claimed were rights violations stemming from a new land-expropriation law.

While global markets were mixed on Monday in reaction to Trump’s latest tariffs, South Africa’s rand initially weakened, and government bond yields soared after he had singled out the country for censure. 

The impact of Trump’s funding freeze will mostly be on more than $400 million of annual funding for the country’s longstanding AIDS prevention and treatment program, but investors are concerned he may also set his sights on South Africa’s preferential trade access to the US.

“USDZAR has seen some extreme price action as a result of headlines from the US,” Nedbank analysts, including Reezwana Sumad, wrote in a note.

“Foreign-exchange markets remain at the mercy of headlines, primarily those related to tariff implementation and suspension of aid from the US at this time.”

The rand slumped as much as 1.4% before paring the decline to trade 0.1% weaker at 18.4280 per dollar by 11:32 a.m. in Johannesburg. Yields on 2035 government rand bonds climbed eight basis points to 10.51%. 

Still, the reaction was relatively muted compared with the selloff that followed Trump’s previous salvo against South Africa.

The rand plunged as much as 2% on February 3 after he first threatened to cut assistance to South Africa, claiming in a Truth Social post, without providing evidence, that the country was confiscating land.

“Absent these tensions with the US, we would expect the rand and SA bonds to rally” on the back of improving economic fundamentals, said Marek Drimal, a strategist at Societe Generale SA.

“However, given the continuing risk of potential further escalation of US-SA disagreements, we would prefer to only buy the rand and bonds on dips.”

Relations with Washington were already strained by South Africa’s refusal to condemn Russia’s invasion of Ukraine and its case in the International Court of Justice alleging Israel’s assault in the Gaza Strip was an act of genocide. 

They worsened last week after Trump and US Secretary of State Marco Rubio falsely claimed South African authorities are seizing property under the expropriation law.

Both ignored President Cyril Ramaphosa’s statement that the assertion was untrue.

Over the past two decades, the US has given South Africa more than $8 billion in bilateral aid, mostly for health programs.

The country has also benefited from the Africa Growth and Opportunity Act, which allows duty-free access for some exports, including agricultural commodities and motor vehicles.

The US is South Africa’s largest trading partner after China, with two-way trade reaching $24 billion in 2023, according to data compiled by Bloomberg.