Forgotten force boosting the rand

South Africa’s rand has been supported by the country’s improving terms of trade, which is boosted by the rising prices of key minerals, particularly gold and platinum.

This is the traditional driver of the rand’s value, which is highly dependent on commodity exports and prices worldwide. 

As a small, open economy, the country is largely at the mercy of global forces in this regard, with global international trade and demand from China particularly critical. 

While local politics remain important, these international factors have a much more significant impact on the rand’s value.

This is feedback from Melville Douglas’ chief investment officer, Bernard Drotschie, who outlined some of the forces bolstering the rand so far in 2025.

The currency began the year largely expected to weaken against the dollar, as the greenback had been strengthening for the past decade due to superior returns in US equity and bond markets, which sucked up global capital. 

This strengthening went into overdrive when Donald Trump won the US election in November and financial markets prepared for significant shifts in trade and fiscal policy. 

Investors largely expected an improved fiscal outlook for the United States after promises of increased government efficiency.

Trump’s tariffs sent uncertainty and volatility soaring, which typically results in capital flowing from riskier emerging market assets towards safe havens in the United States, Europe, and elsewhere.

In South Africa’s case, this was coupled with renewed local uncertainty, as tension within the Government of National Unity (GNU) rose amid several delayed Budget votes.

The country was also singled out by the Trump administration, pushing local uncertainty and volatility to new highs.

These factors combined in April to send the rand to a high of R19.75 to the US dollar, with it also severely weakening against other major currencies.

The currency hit its weakest levels on record against the British pound and euro, which are not as important in terms of global trade but still provide a good indicator of sentiment towards a country and its economy.

The rand bounces back

Since then, the rand has strengthened by nearly 10% versus the US dollar, minimising the impact of rising oil prices on the country and helping to keep inflation contained. 

While there has been a sprinkling of good political news, both globally and internationally, for Drotschie, this is best explained by the country’s improving terms of trade. 

This is typically what determines the value of the rand over a longer period of time, with its value in the short term oscillating significantly based on sentiment. 

Over the longer run, the value of a currency is determined by a country’s economic performance, government finances, and inflation differentials. 

In South Africa, the price of commodities plays a major role as they are the country’s largest export and, thus, the biggest source of foreign exchange earnings. 

Historically, when the price of various commodities rises, the rand, alongside its emerging market peers, tends to strengthen versus the dollar. 

For South Africa, the most important commodities are platinum group metals (PGMs), with the country being the world’s largest exporter. 

Since March 2025, the price of platinum has risen by 55%, while the price of other PGMs has jumped by around 30% due to resilient demand and limited supply. 

This significantly increases South Africa’s income from exports, bolstering the country’s economic activity and the government’s finances. 

As such, it can create a virtuous cycle for South Africa. However, if demand for commodities declines, it can just as easily become a vicious cycle. 

This is a real threat in the coming months as Trump’s tariffs seek to rework the global trade regime, potentially limiting international trade and growth. 

Crucially, these tariffs threaten to spark a trade war with China, which consumes over 20% of South Africa’s exports. Any slowdown in the world’s second-largest economy will have significant consequences for local exports, growth, and the rand. 

Despite this risk, so far, the Chinese economy has proven to be more resilient than expected, bolstering demand for exports and supporting the value of the rand. 

This can be seen in the graph below, which shows the relationship between South Africa’s terms of trade and the rand’s value. As the country’s terms of trade improve, the rand tends to strengthen.