“Record lows unlikely” as Rand weakens amid GNU tensions and global risks
The South African rand is hovering near recent lows today, near the 19.00 mark at approximately 18.85 ZAR per USD as of mid day, driven by a confluence of global and domestic risks.
However RMB currency strategist Manqoba Madinane, said:”Today’s rand weakness is notable, but the dollar is also under severe pressure against global currency majors euro and pound which gives scope for an eventual rand recovery against the greenback once idiosyncratic domestic noise around GNU stability concerns dissipates.
“On a balance of odds, our view is that further sustained rand weakness in the near term is unlikely particularly were the GNU to remain intact while maintaining its current policy framework.”
The rand’s current level of around 18.85 ZAR per USD is approximately 5.2% stronger than its pre-GNU record low of 19.92 ZAR per USD, reached in May 2023, when South Africa faced a precipitous loss of investor confidence amid the Lady R and FATF grey listing saga at time.
The rand’s recent depreciation reflects heightened tension around the stability of South Africa’s Government of National Unity (GNU), with a breakdown in relations between anchor tenants, the African National Congress (ANC) and the Democratic Alliance (DA), sparking investor unease.
“Global investors are increasingly concerned that the GNU may fracture, particularly as the DA has signaled and followed through on its intent to oppose National Treasury’s Budget proposals. This has raised the possibility of a GNU reconstitution, potentially replacing the DA with Action SA.
“Importantly, this shift would not signal a leftward lean in the GNU policy framework,” noted Madinane. “Once the noise subsides, the rand should find support from the GNU’s continued centrist orientation.”
Compounding domestic pressures, global markets adopted a risk-off stance in the run up to the Trump administration’s anticipated announcement of reciprocal tariffs today, dubbed the U.S. “Day of Liberation.” This geopolitical whirlwind has shifted focus away from macroeconomic fundamentals, further perturbing market sentiment.
“We now see risks capped at around 19.00, still below an earlier January peak around the 19.22 mark when GNU stability concerns first emerged,” Madinane explained.
“We remain confident that the rand will stabilise short of record lows.”
While rand weakness and volatility typically pose challenges for monetary policy, Madinane emphasised that the currency’s recent behaviour suggests limited impact on the South African Reserve Bank’s (SARB) reaction function. However, given that the SARB’s global and currency risk concerns have now materialised, the hurdle for instituting previously anticipated policy rate adjustments may have lifted higher.
“USDZAR has been in a volatility compression period, with intermittent spikes fading quickly. We see no evidence this has changed, so today’s movements alone are unlikely to shift SARB policy much.”
More critical, however, is how the SARB interprets the inflationary effects of the forthcoming U.S. reciprocal tariffs.
“That will weigh more heavily on their decision-making than today’s currency fluctuations which could fade in coming days,”Madinane added.
CPI and Inflation Outlook
Looking ahead, global uncertainty surrounding potential retaliation to U.S. tariffs poses the greatest risk to South Africa’s Consumer Price Index (CPI) trajectory.
Nevertheless, RMB maintains a positive outlook for the rand.
“We hold conviction in the rand’s longer-term appreciation bias, which should keep exchange rate-driven inflation risks relatively contained in the months ahead.”
This perspective aligns with recent calls from several economic experts, including RMB’s Chief Economist Isaah Mhlanga for the SARB to adopt a lower, specific inflation target rather than the current 3-6% range.
Such a shift, proponents argue, would enhance price stability and competitiveness, reflecting the SARB’s poised stance toward a more well defined inflation targeting regime.
