Huge boost for the rand

The rand strengthened significantly on Monday as markets anticipate big interest rate cuts in the United States, increasing appetite for risk.

While the local unit has been averaging around R18.88 in recent weeks, it strengthened 1.7% on Monday to trade at R18.28 against the dollar.

The move has largely been driven by data and sentiment around US markets, where weak US data saw a mild contraction in the first quarter at -0.3%.

According to Investec chief economist Annabel Bishop, the weaker print was due to a substantial fall in US net exports of -4.8%, as imports rose sharply ahead of expected US tariffs in April on the so-called “US liberation day”.

However, she said that the GDP drop didn’t indicate the start of a US recession, but rather came because of the stockpiling of imported goods ahead of sharp cost increases.

This was followed by a 20% jump in imports as some of the tariffs were walked back.

“Markets have not nosedived, and the jump in imports was largely counteracted by the lifts in private inventories, fixed investment and personal consumption,” she said.

“The data is indicative of the early disruptive nature of the US trade war.”

As a result, Bishop said that US data will begin to feed through some of the tariff impact on growth and consumption in the second quarter, but this is again expected to be more muted.

“Financial markets are displaying a fair degree of risk on, and the rand is likely to benefit further this month as it likely subsides back towards R18.00/USD, with the domestic currency currently on track to average R18.60/USD this quarter,” she said.

This does not mean that there is no recession risk for the US, however. Current analysis puts a US recession at 40% probability. This is lower than the 60% seen earlier.

A US recession would have a global impact. As the world’s biggest economy, a recession would lead to various negative outcomes for economies tied to it.

Economists have noted that a US recession could lead to a global recession. This, coupled with South Africa’s fragile fiscal state, presents significant threats to employment, trade dynamics, and government finances in 2025.

For employment, a recession generally leads to decreased consumer spending, causing businesses to cut costs, often through layoffs or hiring freezes.

Big risk to the rand

There are also other local risks in play that threaten the rand and the economy in general.

In particular, Bishop flagged the continued calls from within the ANC to oust the Democratic Alliance from the Government of National Unity (GNU).

While ANC Secretary General, Fikile Mbalula, has sought to calm the waters, markets have remained cautious around the future of the GNU since the DA-ANC split over the national budget in April.

The budget affair has proven to be hugely embarrassing for the GNU, and particularly the political parties inside and outside it that pushed the budget through parliament with the contentious VAT hikes in tow.

The DA voted against the budget after failing to get the standing committee on finance to reject the fiscal framework and order National Treasury to amend it to remove the VAT hike.

After the DA’s vote against the budget at committee level, the ANC sought assistance from outside the GNU to pass the framework in the National Assembly, finding willing allies in Action SA and BOSA.

After three weeks of consultations and negotiations—and legal action by the DA and EFF—the parties “agreed” to amend the budget.

This is something that would have been achieved had parties voted to amend the framework at the committee level—directly contradicting the stated intention of other parties that this would not happen.

A third budget is now scheduled for 21 May without the VAT hike, but the bruising—and arguably uneccessary—politicking has permanently damaged perceptions on the GNU.

Markets and investors have shaken off the positive sentiment built up around the GNU, and are now waiting for the government to actually deliver on its promised reforms.

As a result, the rand is way off from its sub-R18/$ levels seen in late 2024, with politics still built into the risk premium.