Rand on the back foot as Trump rattles markets

The South African rand was in the firing line alongside other emerging market currencies on Monday as US President Donald Trump imposed tariffs on some of America’s biggest trading partners, and specifically took aim at South Africa over its Expropriation Bill.

According to Investec chief economist Annabel Bishop, the rand took a mild hit, pushing higher than the average for January.

The rand’s best level last week was R18.42/USD, averaging R18.72/USD over January. On Monday, it hit over R19.00 to the dollar before pulling back to around R18.88.

Bishop noted that the weakness was driven by US dollar strength thanks to general risk aversion in the market.

The latest—and temporary—bout of load shedding also had an impact.

Eskom has subsequently suspended load shedding of electricity, but it remains a risk, and is a characteristic of Investect’s downside risk projections, along with water shedding, as warned by the Department of Water and Sanitation.

However, the adjustment on Monday was largely driven by Trump and his tariff war.

Over the weekend, the Trump administration imposed tariffs of 25% on goods imported from Mexico and Canada—except energy imports from Canada—as previously threatened.

Oil, gas and other energy imports from Canada will be subjected to a 10% tariff, sparking promises of retaliatory tariffs as a trade war gets underway.

“The rand reached R19.04/USD today on the announcements, then pulled back to R18.69/USD, with markets already having partially built-in expectations of higher tariffs from the US, and so somewhat higher inflation after December’s FOMC meeting,” Bishop said.

Trump’s threats to pull funding from South Africa over its land expropriation laws also added to the frenzy on Monday, shedding as much as 2% after Trump made the statement.

Bloomberg analysis noted emerging-market currencies at large selling off Monday against the dollar, with the Mexican peso leading the slide.

MSCI’s EM currency fell as much as 0.7%, its biggest drop since Trump secured his second term as president, as Bloomberg’s dollar index soared to the highest since November 2022. An EM equity index dropped more than 2% at one point.

Mexican assets were the hardest hit, with the peso at its lowest against the dollar in almost three years, after Trump slapped levies of 25% on both Mexico and Canada, and Mexican President Claudia Sheinbaum pledged retaliation.

The unfolding trade war has got investors upping their bets on the dollar on a view that the tariffs will fuel inflation and limit the room for the Federal Reserve to cut interest rates.

Traders also expect the levies to hurt foreign economies more than the US, as American demand declines for costlier imports.

“I expect more pain for emerging markets,” Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA, said, predicting that direct tariff hits would be compounded by the impact from China.

“Stronger US dollar tightens financial conditions and a negative supply shock will weaken global growth on which EM’s depend,” he added.

Many economists see the Mexico continuing to bear the brunt, with Goldman Sachs Group Inc. forecasting the peso at 22 per dollar, a roughly 5% depreciation from current levels. JPMorgan Chase & Co. sees an immediate 2%-4% depreciation and a 20 basis-point jump in local bond yields.

South African assets were also in the firing line, with the Johannesburg stock index shedding more than 1% and sovereign dollar bonds down more than one cent in price. Yields on rand-denominated 10-year debt jumped about 20 basis points off Friday’s close.

Bishop said that volatility for the rand is set to continue, mirroring the previous Trump administration.

“Under the prior Trump administration, substantial protectionism slowed global growth and trade, weakening the rand and creating risk-off sentiment, with markets factoring in similar, and the trajectory for the rand is flat to somewhat weaker,” she said.

With Bloomberg