Trump, tariffs and a surging rand: welcome to currency twilight zone

19 May 2025

Waiting for the other shoe to drop. Forecasts for growth have been slashed, so why does the rand keep getting stronger?

Unfortunately, we are indeed living in interesting times. April’s market madness had analysts and investors scrambling for purchase. Is this the end of dollar hegemony? Or just a market correction? How serious is US President Donald Trump about these tariffs? What does the sudden entente between China and the US mean?

In among the chaos, the rand has strengthened considerably against the dollar, even as the longer-term economic and political outlook has cratered. But why is the rand defying gravity and is this magic trick sustainable?

SA’s (serious) external and domestic risks

The global economy has had a rough month. Trump’s aggressive approach, most notably the “reciprocal tariffs” he announced on 2 April 2025 (“Liberation Day” apparently) led to the International Monetary Fund (IMF) slashing its global growth forecast, down to 2.8% from the 3.3% projection in January.

While the impact of Trump’s attempt to reshape international trade will be felt globally, there’s growing concern over its impact in South Africa. When the IMF cut the global growth forecast in April, it also took aim at South Africa’s economic outlook. In October last year, President Cyril Ramaphosa set a target of 3.3% growth by the end of 2025. Those figures were seen as optimistic to say the least, with the IMF seeing growth of 1.5% as more likely. But with the impact of the tariffs taken into account, the IMF is now expecting that to drop further to just 1%.

In recent days, both Moody’s, the international ratings firm, and the Bureau for Economic Research at Stellenbosch University have also slashed their growth outlooks for South Africa. Moody’s is now expecting growth of 1.5%, down from 1.7%. The bureau agrees, though it had expected growth to be 2% prior to Trump’s tariff announcement.

The South African Reserve Bank (SARB) hasn’t offered much optimism either. While it has held the key interest rate at 7.5%, citing easing inflation (now at a multiyear low of 2.7%), the central bank has also issued stark warnings about global trade instability and political risks.

The political risk is stark. The Government of National Unity (GNU) is not just wobbling; it has toppled over and is lying face down in the dirt. Few political actors seem willing to help it up. After dropping the controversial VAT increase to prevent the GNU from collapsing, the government is set to present the Budget for a third time this week. But more trouble is brewing between the governing parties.

The DA is fighting the Employment Equity Amendment Act in court, with the Minister of Employment and Labour, Nomakhosazana Meth, saying: “The DA is actively sabotaging the transformation goals that have been pursued since the end of the apartheid era, effectively hindering progress towards equality and fairness in the workplace.”

In another instance of collegial hatred, on 7 May 2025 Nicholas Gotsell, a prominent DA MP, wrote a scathing article condemning the SANDF claim that its deployment to the DRC was a success, saying: “This is a delusional attempt to mask what was, by every measurable standard, a catastrophic failure of the ANC’s regional ambitions — both strategically and morally.” To say the DA and the ANC are unhappy bedfellows is an understatement.

Why the rand isn’t tanking

So, with so much economic and political doom and gloom, how to explain the rand’s surprising resilience?

The first answer has little to do with South Africa, but more to do with the global reaction to Trumponomics version 2.0. There is a growing sense that Trump’s chaotic and aggressive approach has shaken global investor’s faith in his capacity as a steward of the US economy.

Investors hate uncertainty, and even before the reciprocal tariff announcement, Trump’s approach — shutting down huge swathes of the federal government, illegally firing independent regulators, and publicly stating his desire to annex Canada and Greenland — had already caused alarm among institutional investors. His administration’s laissez faire approach to the US’ enormous debt-pile ($36-trillion and counting) is also a mounting concern. On Friday, 16 May, Moody’s became the last major credit ratings agency to strip US debt of its AAA rating, citing “the trend of large annual fiscal deficits and growing interest costs”.

With tariffs expected to dampen growth in the US, bond yields have risen and the dollar, normally a safe haven in times of uncertainty, has been hit hard as investors moved money out of dollarised assets. This has benefited most currencies around the world, including the rand.

The rand has also been the beneficiary of carry trades, when speculators borrow in low-yield currencies (like the euro) and invest in higher-yielding ones (like the rand). Following the collapse of the yen carry trade last year, speculators have looked to other currencies and the rand, with a high real interest rate and a history of liquidity, has gained increasing international attention.

This attention, welcome or unwelcome as it may be, is also a measure of the international financial community’s confidence in the South African Reserve Bank. Through a seemingly never-ending series of crises (Covid-19, load shedding, inflation) the SARB has repeatedly demonstrated its independence and competence. Despite calls from across the political spectrum for looser monetary policy, the SARB has remained conservative and forward-looking, and the rand is reaping the rewards in an increasingly uncertain world.

Finally, and perhaps most importantly, there is South Africa’s healthy trade balance. Commodity and precious metal prices are sky high. Gold, already on an extraordinary bull run prior to Trump’s electoral victory, has become the asset of choice for traders seeking relief from the market chaos, and prices are expected to remain elevated. Historically high prices for coal and platinum are also contributing to South Africa’s strong position.

Asian demand, and Chinese demand in particular, for commodities and precious metals is forecast to remain high in the medium term, and this will continue to offset internal weakness. On 12 May, the dollar surged against most currencies following the announcement of the 90-day suspension of tariffs between China and the US. But the rand/dollar exchange rate remained relatively stable. Investors know that what is good for China is good for South Africa.

Can the rand keep this up?

The short answer is “maybe?” Not very helpful, but outlooks for the rand and South Africa in general vary wildly depending on who you listen to.

Investec’s base case scenario is for the rand to continue to strengthen throughout 2025, reaching 18 to the dollar by year end. CitiGroup agrees, with analysts expecting the rand to strengthen to below 18 per dollar. They argue that the rand will continue to benefit from high commodity prices, and remain optimistic about Eskom’s ability to keep the lights on through the winter.

UBS and Societe Generale disagree though, with both expecting the rand to decline to 20 per dollar this winter, with a risk of further depreciation. Both banks cite risks from US tariffs, a China slowdown and ongoing political turbulence.

It’s also important to note here the probable end of the Africa Growth and Opportunity Act (Agoa). Due to expire in September 2025 — if Trump allows it to live that long — the impact on the South African economy will be huge. Experts estimate that South Africa is due to lose $3.567-billion worth of mainly automobile and agricultural annual exports (as of 2023), taking off approximately 0.3% from GDP.

Wednesday, 21 May, could prove pivotal for the rand’s fortunes. Ramaphosa and Trump are due to meet in Washington, the Budget will be presented to Parliament for a third time, and domestic inflation and retail figures will be released. The outcomes and investor response to these three events will no doubt set the tone for the next few months.

Unstable foundations

The rand’s current strength is built on a combination of external events, central bank credibility, and commodity luck. But none of these are particularly stable foundations. Further political instability, trade disruption (from Asia or the US), or an unexpected return of power cuts could reverse fortunes almost overnight.

Investec’s confidence in the base case scenario stated above is only 50%. Their analysts have another scenario at 32% likelihood, where the rand reaches its worst ever rate of 20.50 to the dollar by year end. In this scenario, South Africa’s debt situation deteriorates as targets are missed, and political instability continues. Recession ensues, load shedding and infrastructure bottlenecks worsen, international investment dries up as the rand slumps and widespread civil unrest breaks out. Not a pretty picture.

So, while the rand looks strong today, we may simply be waiting for the other shoe to drop. Investors can enjoy the current calm — but prepare for a storm. DM

Chris Cammack is partner manager at fxscouts.co.za. He also co-hosts the Let’s Talk Forex podcast with Alison Heyerdahl.

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Business Maverick

SA’s (serious) external and domestic risks

Why the rand isn’t tanking

Can the rand keep this up?

Unstable foundations