The United States dollar is expected to remain weak this quarter, which spells good news for South Africa’s rand.

However, South Africa’s low growth environment and lacklustre economic reforms will continue to prevent the currency from reaching its fair value.

Investec chief economist Annabel Bishop recently explained that the rand fluctuated around the R18.00/USD mark in the second half of last month due to US dollar weakness. 

So far this month, it has started off below R18.00/USD, at R17.90/USD on Monday, 2 June 2025.

The rand dropped to R17.77/USD on Friday, 30 May 2025, and there is a likelihood of further modest volatility this year as well. 

“Sentiment has improved somewhat as well, bolstering risk assets, as the US has been amenable to reducing tariffs through negotiations,” Bishop said.

Mid-January saw the rand at R19.23/USD, then in April at R19.93/USD, as fears over the loss of the DA in the Government of National Unity (GNU) rattled markets. Public concerns also arose in April around the ANC’s dominance of the GNU.  

Bishop said this political risk that was elevated in April has not fully dissipated, with net sales of South African equities by foreign investors recorded for this year and for each month.

However, she said these sales lessened in May compared to earlier in the year.

“South Africa continues to see a low growth environment, with the first reading of GDP activity for this year due out tomorrow, but widely expected to see a contraction,” she said. 

This contraction is expected because various measures of economic activity have weakened, which is negative for the rand.

“Persistent weak economic growth in South Africa tends to be a disincentive for foreign investors, along with the rand’s depreciation trend, with domestic net purchases of South African equities positive in May, but not foreigners’ purchases,” Bishop explained.

The rand has experienced an underpin of weakness from this and is not expected to strengthen to its fair value of close to R16.00/USD until the fundamentals for economic growth improve in South Africa. 

Inflation and interest rates

Another factor weighing on South Africa is that the rand’s exchange rate against the US dollar heavily influences inflation in the country via commodity prices.

However, Bishop pointed out that the nominal trade-weighted rand is key too, and its weakness will provide some limit to disinflation.

She said the widely anticipated, recent interest rate cut in South Africa saw mild rand weakness, as the interest rate differential between South Africa and the United States narrowed somewhat. 

However, the two 25 basis point interest rate cuts priced in for the United States this year diminished the potential for further rand weakness.

Bishop said South Africa has seen some interest from foreign investors in its bond market, with R11.3 billion for the year to date.

However, this has largely been offset by net sales of South African equities by foreign investors.

“With markets tending to become more risk-averse as the Northern Hemisphere’s summer approaches, with many traders reducing risk exposure over the period in order to take vacations, rand strength will be limited to a degree in the near term,” she said.

“In addition, the US interest rate cuts are only anticipated from Q4 2025 currently.” 

“However, further US interest rate cuts are built into market expectations for 2026 and 2027, allowing for further rand strength against the US dollar in the period.”

Bishop lamented that structural constraints continue to limit economic growth in South Africa, particularly in the mining production sector, which contracted by close to 3.0% in Q1 2025.

“Economic growth projections for 2025 continue to be revised down, with the latest drop from the SARB to 1.0% y/y, and the revisions to our forecasts this month are likely to see a further drop too, to likely 0.9% y/y,” she said.