Good news about the rand

Investors have fled from the US dollar amid uncertainty following the volatility that has hit financial markets due to the imposition of widespread tariffs on goods imported into the world’s largest economy. 

This is strange considering the US dollar is seen as a traditional safe haven, with United States Treasuries being widely regarded as the safest financial asset. 

The US dollar’s weakness has been coupled with rising commodity prices, particularly precious metals prices, which have boosted emerging market currencies such as the rand. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined this surprising trend in foreign exchange markets in a recent research note. 

Odendaal explained that the standout feature of foreign exchange is that the dollar, the traditional safe haven, sells off during market stress.  

Instead of running towards the dollar, investors fled, and the trade-weighted dollar index fell to its lowest level in three years. 

It remains elevated relative to its longer-term history and potentially has further room to fall if the growth outlook sours and the US Federal Reserve starts cutting rates. 

If the US Fed begins cutting rates, the risk-adjusted return of assets such as US Treasuries will decline, making them relatively less attractive to investors. 

This may result in investors taking more money out of US financial assets and investing elsewhere, weakening the dollar and potentially boosting other currencies. 

Moreover, given erratic US policymaking, international investors could continue to rebalance their portfolios away from American assets after being massively overweight over the last decade. 

This would be a cyclical move out of dollar assets, potentially threatening the dollar’s role in global finance and commerce. However, Odendaal said it is too soon to know for sure. 

For the time being, there is simply no credible alternative. But the fact that the question is being discussed is telling, he said. 

The graph below shows the decline in the trade-weighted dollar index to its lowest level in three years. 

The rand rollercoaster

The rand, meanwhile, behaved exactly as one would expect during an episode of extreme global risk aversion.

It fell from R18.32 at the start of April to R19.92, before regaining most of this lost ground. The rand typically sells off when global investors are jittery and then stabilises and strengthens. 

It just happened on a very compressed timescale, highlighting once again how difficult it is to time the currency.

This has been compounded by speculation regarding the future of South Africa’s ruling Government of National Unity (GNU). 

Stanlib’s head of multi-asset, Marius Oberholzer, said that despite dollar weakness, not everything is working in the rand’s favour. 

Against the dollar, the rand faces ongoing pressure, particularly given the South African government’s foreign policy position, which, while stated as neutral, is perceived by many as antagonistic to US interests. 

The rand’s vulnerability to global risk aversion is well-known. By emerging market standards, its deep currency and derivative markets mean that the rand acts as a proxy for broader issues, not just those of its own making.

However, with tariffs being implemented while the global economy was beginning to show signs of slowing down, the impact on the dollar’s strength could be severe. 

The derisking by global market players, driven by movements in equities, bonds, and currencies, could lead to long-lasting consequences.

These dynamics, including US policy changes, could contribute to a perceived decline in the US dollar’s dominance and the broader implications of de-dollarisation. 

This creates a complex outlook for the rand, characterised by near-term weakness, potential for stabilisation, and considerable unpredictability. 

Oberholzer said that US tariffs, intended to enhance domestic competitiveness, may paradoxically weaken global demand and GDP growth. 

While this will knock the United States’ reputation as the world’s premier economy and destination for investment, it will also weaken emerging market currencies such as the rand. 

If the global economy slows and demand for commodities declines, commodity-dependent economies such as South Africa may come under immense pressure.