Rand reaches record low on Wednesday, trading at R19.93/dollar

The rand was in freefall due to disagreements in the government of national unity (GNU) and fears that it will collapse, while the US’ import tariffs were simply making matters worse for the local currency.

The rand closed at R19.74/dollar on Tuesday night but surpassed that on Wednesday to trade at R19.83/dollar. On Wednesday night, the rand reached an all-time high of R19.93/dollar but strengthened slightly. It is currently trading at R19.47/dollar after Trump postponed his tariffs by 90 days.

Last Friday, the local currency breached the psychological barrier of R19/dollar, trading at R19.01, down from R18.30 on 31 March.

The local currency already traded above R25/pound on Tuesday and even reached R25.47 at one stage on Wednesday before strengthening slightly to R25.22 on Wednesday night.

ALSO READ: ANC ultimatum forces DA to ‘leave or adapt’, analyst says

Global and domestic issues reason for the rand’s distress

Maarten Ackerman, chief economist at Citadel, says the rand’s fall is due to the global risk triggered by Trump’ tariffs as well as domestic issues around the gridlock on the budget and the future of the GNU.

“To be honest, the rand took more pain as a result of the local issues due to uncertainty whether the GNU will stay together, while there was a little less pain from the global tariff announcement.”

Koketso Mano, senior economist at FNB, also says several factors contributed to the rand’s decline in the past week, including global policy uncertainty, especially around trade restrictions, which could slow down global economic growth or even lead to a recession.

“This increased risk aversion in financial markets and negatively affected emerging market currencies. In addition, local issues, such as instability within the GNU and uncertainty around economic reforms added pressure on the local currency.”

ALSO READ: The DA can walk away from GNU, says Mbalula

Threat to DA participation in GNU rattled financial markets

Annabel Bishop, chief economist at Investec, says the threat to the DA’s participation in the GNU has severely rattled financial markets. “Recent substantial US dollar weakness would see the rand below R18.00/dollar, nearing R17.50/dollar, but instead it is above R19.00/dollar on high political risk.

“The rand is currently the worst performer in the emerging market basket of currencies. Severely heightened political uncertainty has seen the domestic currency reach R19.44/dollar, with the rand’s weakness driven by domestic factors alone.”

Bishop says that without the threat of the DA exiting the GNU, the rand would be substantially stronger, well below R18.00/dollar after the imposition of universal tariffs from the US, with many countries seeing higher protectionism.

Nolan Wapenaar, Co-CIO at investment firm Anchor also believes the rand faced an onslaught from domestic confidence flailing as the GNU displayed weakness and questions around its survival persist.

“This is dampening the global enthusiasm for South African assets at a time when the Trump trade war has financial markets distressed and investor risk appetite is rapidly shrinking.”

ALSO READ: Is Trump weaponising dollar against South Africa?

Rand reached record low against the US dollar 

Ackerman says the rand is touching on a record low, and if the GNU breaks up, the rand can certainly test those levels. “We are definitely in that range of record lows at this point in time.”

Mano points out that the rand is not at a record low and says while the exact exchange rate can vary, the rand has been weaker in the past, especially in terms of spot mid-market rates.

Bishop says if the GNU breaks up, the rand will likely head towards R21.00/dollar immediately and then weaken to beyond R22.00/dollar depending on the new partners of the GNU, with the sudden shock to financial markets and worries over a left-shift in economic policy.

Wapenaar believes that although the rand is not at a record low yet, it is certainly quite plausible that we will test a new low for the rand in the coming days.

The last time the rand was in so much trouble was in May 2023, when the US ambassador to South Africa alleged that the ship Lady R was in Simon’s Town to load weapons for Russia. Ackerman says a similar sell-off happened during Covid when South Africa was downgraded in investment grade.

Mano says the rand was also weak in 2023 when it hit R19.86 as global concerns over economic growth, rising interest rates and geopolitical tensions, particularly around the Russia- Ukraine conflict, weighed heavily on markets. “Locally, the high levels of load shedding and fears of further power cuts also dampened confidence and growth prospects.”

ALSO READ: Weekly economic wrap: Rand keeps its cool as Trump tries to punish SA

What is the fair value of the rand?

If the rand hits R20/dollar, it will not be a fair value. Ackerman says they believe the rand is normally overreacting at these kinds of levels. “Fair value in our mind is probably closer to purchase power parity, and at this point in time, it is closer to R18.50 or maybe a little higher.”

Mano says that, based on their estimates, the fair value of the rand is around R18/dollar. ”Therefore, the rand is currently undervalued and could correct if domestic policy risks or global trade tensions ease.”

Wapenaar agrees, saying Anchor believes fair value for the rand is closer to R16.00/dollar. “The massive risk-off sentiment means that the rand is significantly weaker than it ordinarily would be. As the trade war escalates, the rand can keep weakening and certainly could breach the R20/dollar level, although we do not think that the weakness will be sustained.”

ALSO READ: Strong rand not reflection of SA’s economic health

Where will the local currency go in the coming days and weeks?

Ackerman says his expectations for the coming days and weeks depend on how the risk environment develops. “If we do get news that the GNU is coming to an end or that the ANC is looking for different partners, the rand will definitely test levels just below R20 or even as high as R22.

“On the other hand, if the GNU can stay together, it will immediately bring stability for the rand. On top of that, if China continues with what they were talking about the last couple of weeks to stimulate their economy to protect them against the trade tariffs, coupled with a continuation of the GNU it can actually put the rand on a very strong footing.

“This shows how difficult the current environment is, even in the global uncertainty we are dealing with.”

Mano expects the rand to remain under pressure, but some recovery is possible. “The US dollar is also facing challenges, which should prevent further significant weakness in the rand. Additionally, higher gold prices and lower oil prices could provide some relief.

“Around 50% of the rand’s current weakness is linked to domestic risks, particularly regarding the stability of the GNU. While the potential for the rand to breach R20 remains, this largely depends on how the GNU situation unfolds.”

Wapenaar says in the near term, the local currency could do anything. “A let-up in the trade war would see some recovery, while further escalation will see the rand trade weaker than R20 to a dollar.