Good news about the rand 

A weaker dollar and expectations of interest rate cuts in the United States have buoyed the rand over the past week, and the local currency is expected to continue gaining from dollar weakness.

Investec chief economist Annabel Bishop recently explained how the rand’s movement continues to be dominated by events in the United States.

The local currency gained to R18.29/USD on Monday, 5 May 2025, as weak GDP data from the United States saw the dollar weaken slightly.

The United States’ economy suffered a mild contraction in the first quarter of 2025.

While this contraction was tiny, Bishop said expectations of interest rate cuts in the United States, with three 25 basis point cuts now expected before the end of the year, have also supported financial sentiment and the rand.

To date, the rand averages R18.88/USD as the midpoint of the quarter nears. “We continue to expect the domestic currency will average R18.60/USD for the second quarter of 2025,” she said. 

She further expects the United States’ Federal Reserve to cut interest rates by 25 basis points by July, if not before.

Interest rate cuts in the United States would likely be positive for the rand if the South African Reserve Bank cuts domestic interest rates by less than the Federal Reserve.

This is because interest rate cuts in the United States mean investors would earn smaller returns on dollar-denominated assets, weakening the dollar.

Therefore, investors would look for better returns elsewhere, often turning to countries like South Africa, where interest rates tend to be higher. This increased demand boosts the rand.

Bishop reiterated that the negative GDP outcome in the United States is very mild, indicating the economy essentially stalled in the first quarter of 2025.

She explained that a substantial fall in the United States’ net exports was the main driver for the contraction.

This drop in net exports is due to a sharp rise in imports ahead of expected United States tariffs in April on the US’s so-called ‘Liberation Day’.

However, Bishop specified that the US GDP drop is not seen as the start of a recession but rather as a result of stockpiling imported goods ahead of sharp cost increases.

Specifically, import costs in the United States are expected to jump over 20% on an effective basis due to tariff lifts alone. 

“Markets have not nosedived, and the jump in imports was largely counteracted by the lifts in private inventories, fixed investment and personal consumption,” Bishop said.

However, she noted that the data also indicates the early disruptive nature of the United States’ trade war.

Local factors

While US dollar weakness and interest rate cuts are set to boost the rand, Bishop warned that domestic factors continue to weigh on the local currency.

In South Africa, the ANC continues to see calls to oust the DA from the Government of National Unity (GNU), reportedly led by a ‘parliamentary caucus’.

 ANC Secretary General Fikile Mbalula has sought to calm the waters, saying no caucus can revolt against the ANC. “It will never happen,” he said.

“There is no caucus that can rebel against the ANC. People have got the choice to join other political parties,” he said.

In addition, South Africa’s 2025 Budget, now scheduled for 21 March, has been a sticking point with the DA’s refusal to vote alongside the ANC on the last two versions.

The Institute of Race Relations’ (IRR) last poll shows the DA at 30.3% and the ANC at 29.7%, partly due to the ANC’s proposed VAT increases. 

The IRR noted that the public perceives the GNU as a vehicle for political moderation and collaboration, but the ANC has estranged voters with its pursuit of “unpopular socio-economic policies” like the VAT hike.

The IRR further lamented South Africa’s business-friendliness, or rather, the lack thereof, saying the country has not been “open for business” in years. 

“Current policy is undermining growth and pushing the country ever deeper into a trap it will struggle to escape,” the institute warned.

This sentiment was recently echoed by Business Leadership South Africa CEO Busi Mavuso, who said South Africa has been stuck in a low-growth trap for the past decade and a half, adding that tough decisions will need to be made to escape.

“The reason this budget process has been so difficult is because of very mediocre economic growth,” she said. 

“If we want to achieve sustainable public spending, we need growth that generates government revenue sustainably.”

As it stands, Mavuso said South Africa’s politicians must make difficult choices, especially since the country’s economic growth expectations have been dampened. 

These lower expectations translate into less tax revenue available to the government, as businesses will be less profitable and consumer spending will be more subdued. 

“The situation we must budget for is now worse than two months ago,” she warned.