Finance

Rand plummets after Trump cuts funding to South Africa

The rand has weakened significantly in the hours after US President Donald Trump announced he was cutting all funding to South Africa. 

This has exacerbated the rand’s weakness after Trump imposed 25% tariffs on both Mexico and Canada, with 10% levied on goods from China. 

The selloff in emerging-market currencies comes as investors raised bets on the dollar given the expectation that US tariffs will fuel inflation and limit the room for the Federal Reserve to ease policy. 

This should translate into a stronger dollar in the short term as US assets become more attractive on a risk-adjusted basis. 

The greenback is also benefiting as traders expect the levies to hurt foreign economies more than the US, as American demand declines for costlier imports.

Tariffs on China will also have a particularly outsized impact on South Africa as it is the country’s largest trading partner and a vital source of foreign exchange earnings. 

While this first barrage of tariffs from the Trump administration weakened all emerging market currencies, the US President singled out South Africa towards the end of Sunday, 2 February.

In a post on his Truth Social Network, Trump said that his administration would be cutting all funding towards South Africa. 

“South Africa is confiscating land and treating certain classes of people very badly. It is a bad situation that the Radical Left Media doesn’t want to so much as mention,” Trump said in reference to the newly-signed Expropriation Bill.

“A massive human rights violation, at a minimum, is happening for all to see. The United States won’t stand for it. We will act.”

“Also, I will be cutting off all future funding to South Africa until a full investigation of this situation has been completed!” 

Following this announcement, the rand weakened sharply by 2% versus the dollar. The currency crossed the R19 mark to the dollar for the first time since the South African election at the end of May 2024. 

The rand has regained some strength, with it weakening by 1.63% to R18.97 as of 08:00 am on Monday, 3 February. 

The rand has been under pressure since Trump won the US election on 5 November, with investors flocking to the dollar for safety amid increasing uncertainty. 

Until then, the rand had been on a strong run versus the dollar and still ended the year as the best-performing emerging market currency. 

The formation of the Government of National Unity (GNU) and load-shedding being suspended for over 300 days had seen the rand strengthen by 6% versus the dollar from the formation of a new government in early June to the US election. 

However, since Trump won the US presidency, investors have bet against emerging market currencies, including the rand, and have flocked to the dollar. 

This is a continuation of a trend over the past decade where the vast majority of any excess capital has flown into the US. 

Interest rates likely being higher for longer in the US have pushed its bond yields higher, making them relatively more attractive to investors. 

As a result, many are parking excess cash in US government bonds or US-based stocks. In some cases, investors have also pulled money out of emerging markets to capitalise on the higher risk-adjusted returns available in the US. 

This is all compounded by increased global uncertainty as Donald Trump begins his second term as US President. 

During times of elevated uncertainty, investors tend to flock to the dollar and US-based assets as they are viewed as a safe haven. 

These short-term factors exacerbate the longer-term trend of investors worldwide pumping money into US stocks. 

As these assets have generated the best risk-adjusted returns for investors over the past decade, many view it as the only game in town regarding equity investments.

This has meant that much of global liquidity in the past few years has gone into US assets, boosting the dollar in the process. 

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