Rand could crash to R22 to the dollar

Investec chief economist Annabel Bishop says ructions within the Government of National Unity (GNU) have tanked the rand, as local market uncertainty outweighs the dollar destruction caused by Trump’s tariff war.

Bishop noted that substantial US dollar weakness because of a trade war initiated by US President Donald Trump on Wednesday, 2 April, should have pulled the rand closer to R17.50/$.

However, the threat of having the Democratic Alliance (DA) exit or be booted from the GNU has instead sent the local unit in the opposite direction, hitting over R19.40/$.

While Trump launched the tariff to strengthen the dollar and local US markets by incentivising local production, the move has had the opposite effect.

Instead of boosting US markets, fears of a near-certain recession have kicked in, hitting the dollar hard.

According to Bishop, this US dollar weakness would usually see the rand below R18.00/$, nearing R17.50/$, but instead, it’s above R19.00/$ on high political risk.

“The rand is the worst performer in the emerging market basket of currencies currently,” she said.

“Severely heightened political uncertainty has seen the domestic currency reach R19.44/USD, with the rand’s weakness driven by domestic factors alone.”

The main risk factors shaking local markets are the future of the GNU and the DA’s possible exit.

The DA voted against the ANC-led GNU’s budget last week, after negotiations with the ANC broke down and the latter shopped for outside support.

The budget was ultimately passed with the support of smaller parties in parliament, giving the ANC a stronger platform to push for a GNU without the DA.

However, markets view this as incredibly risky, as the a GNU without the DA would lost its supermajority, leading to further in-fighting as the ANC would subsequently have to rely on extremely narrow votes to pass anything.

Bishop said that without the threat of the DA exiting the GNU, the rand would be substantially stronger, and well below R18.00/USD, even after the imposition of universal tariffs from the US.

This is because global financial markets were already risk-averse before the tariff announcements—and the blow-up between the ANC and DA exacerbated this in a big way.

While discussions on the future of the GNU remain underway, the DA’s exit would see markets deteriorate rapidly.

“A cabinet reshuffle is expected if the ANC and DA do not overcome their difficulties. The DA wishes to remain in government, and a compromise will be needed, while some ANC members are keen for the DA to leave,” she said.

The ANC working group will meet on Monday on the matter, with financial markets on edge over the outcome.

Bishop said the rand will likely weaken past its prior weak point of R20.00/$ on a DA GNU exit.

“The rand would likely head towards R21.00/$ immediately and then weaken to beyond R22.00/$ depending on the new partners of the GNU, with the sudden shock to financial markets and worries over a left-shift in economic policy,” she said.

Having the DA exit the GNU leaves the door open for leftist parties like the EFF and MK Party to potentially enter. This is seen as a worst-case scenario for many economists and market analysts.

Alternatively, the GNU could invite the smaller parties that helped get the budget across the finish line into the coalition—but this, too, carries risks.

The economist said that the solution that markets want is a compromise between the DA and ANC, with the former remaining in GNU and a part of government—with a degree of influence over the economy.

However, she said that some factions in the ANC are “increasingly closed to the idea,” preferring to see the DA removed.