Rand in trouble

The rand is expected to remain highly volatile, as the local currency will be significantly affected by the US dollar, announcements from the White House, and local developments like the 2025 Budget.

Investec chief economist Annabel Bishop said the rand continues to see an underpin of strength, reaching R18.31/USD on Monday, 18 February.

This strength was due to a slowdown in US tariff applications and a moderation in the strength of the US dollar.

However, since then, US President Donald Trump has announced his plans to implement a reciprocal tariff approach to global trade. 

“Whatever countries charge the United States of America, we will charge them – no more, no less!” he announced on 17 February via social media.

This has seen the rand’s value against the dollar fall by around 0.3% between 17 and 18 February. The rand has averaged R18.65/USD so far this year, with the first quarter now past the halfway mark.

Bishop said the domestic currency is likely to remain very volatile, highly affected by the US dollar and events in the United States. 

The rand started the year at R18.87/USD and rose to R19.23/USD by mid-January on US dollar strength.

Conversely, the dollar has seen a strong year so far due to worries about the incoming US administration and its effects on financial markets, economies, and countries, which drove investors to safe-haven assets like US bonds.

The US dollar also saw substantial strength following December 2024’s Federal Open Market Committee (FOMC) meeting in the United States.

This meeting raised US inflation forecasts, causing markets to see a delay and reduction in anticipated US interest rate cuts over 2025.

United States interest rate cuts benefit the rand by weakening the US dollar. The January FOMC meeting saw no change in US rates, and the same is expected at the next FOMC meeting in March. 

In addition, market expectations have been pushing out the timing of the next US rate cut.

The market expects a 25 basis point cut in the US in September with 100% or more certainty, far later than previous expectations, which saw the cut in June or July.

“The push out in the timing in market expectations for US interest rate cuts has a significant effect on the US dollar, and so the rand, but the key remains the outcome on US tariffs, with markets recalibrating to a more subdued outlook,” Bishop explained.

Locally, South Africa’s Budget is set to be tabled this week and could also significantly impact the local currency’s strength.

Bishop said the projections and estimates for the current fiscal year on government borrowings are key for the rand. 

Rating agencies will also watch the government’s gross loan debt to GDP ratio closely. She explained that projected higher borrowings on weaker GDP really matter, as does this metric’s improvement. 

“A reduction in planned borrowings tends to attract investors, including foreign investors, and so see rand strength, while fiscal slippage with higher planned issuance tends to have the opposite effect,” Bishop said.

Standard Bank chief economist Goolam Ballim recently said he sees the current fair value of the rand, including the significant risk premium attached to South Africa, as between R17.80/USD and R18/USD. 

Ballim explained that the coming years will be incredibly volatile as the changes occurring in the global economy are not merely cyclical but structural.

These changes make forecasting far into the future difficult, and projections are likely to change significantly throughout 2025 as new data is available. 

One thing that is clear is that the US dollar will continue to strengthen as investors turn to it as a relatively safe haven amid this increasing uncertainty.

Since Trump won the US presidential election in November 2024, the rand has been on the back foot as global capital flowed into the US and out of emerging markets. 

This has been coupled with rand weakness driven by fluctuating tensions amid partners in the Government of National Unity (GNU).

Ballim described this as a double whammy for the currency, weakening it to levels seen pre-GNU.

Despite this weakening, Ballim does not think the rand has fallen far from its fair value, considering South Africa’s distinctive risks.

The fair value of a currency is most commonly calculated using inflation differentials or by using Purchasing Power Parity. 

These methods are based on the fact that the rand will naturally adjust to ensure South African exports are priced competitively worldwide.

Ballim’s calculations suggest that the rand’s fair value is between R17.80/USD and R18/USD – not far off its current level of around R18.44/USD.