- The rand remains caught up in the tumult of global and local uncertainty, with analysts saying investors should remain cautious.
- Along with the US-China trade war, they warn that the government of national unity's coalition fragility continues to make predictions difficult.
- One analyst warns that even if the DA and ANC manage to mend fences, the recent events will likely result in a permanent rise in the rand's risk premium.
- For more financial news, go to the News24 Business front page.
The rand is currently caught between US President Donald Trump's wrath and the deep blue sea of uncertainty surrounding the government of national unity (GNU), with analysts warning there may be further volatility ahead.
Nevertheless, the outlook remains murky for what the impact of Trump's tariff shock to the global economy might be, with some saying it will prove inflationary for the US economy, while others say it could cause a recession that could prompt the Federal Reserve to cut rates.
Either way, analyst are preaching caution in the wake of Trump's haphazard policymaking, which saw him slap steep import duties on more than 100 countries on 2 April, only to back down days later with a 90-day pause on tariffs to countries that had reached out to negotiate.
But China was not among those nations, and it now faces 145% tariffs on its exports to the US. It also retaliated with 125% tariffs on American goods, leaving the world's two largest economies fighting an all-out trade war that could wreak havoc on small, open economies like SA.
"The formula used to calculate the tariffs significantly overshot market expectations [and] created great concern around global trade and the impact it would have on the US economy, but also the world's poorest nations and emerging markets, of which SA is one," Bianca Botes, Director of Citadel Global, told News24.
"Given the uncertainty lingering with the GNU and a very unpredictable President Trump, sentiment can turn rapidly and often catch you in its crosshairs - a cautious approach is advised."
READ | Trade war panic: Dollar tumbles, China hikes US tariffs to 125%
With the rand having recovered from close to R20/$ on 9 April to R19.19/$ by afternoon trade on Friday, the question now is whether SA can successfully negotiate mutually beneficial trade terms with the US as the clock ticks down on Trump's 90-day pause of his punitive 31% tariff on domestic goods.
However, the situation is further complicated by SA's budget dispute that threatens to collapse the ANC-DA alliance that has formed the bedrock of the GNU.
"The DA and ANC both, despite all the noise, realise that they need each other," Old Mutual economist Johann Els told News24, adding:
I think sanity will prevail - we'll get through this.
Els likens the impact of Trump's "Liberation Day" tariffs to Covid-19, which also disrupted global trade and financial markets and says there will be economic fallout. He now sees a 65% probability of a recession in the world's biggest economy, which has prompted him to trim his economic growth forecast for SA from 2.2% to 1.7% for 2025.
Els says that could prompt the US Federal Reserve, which he describes as the world's "most reactive" central bank, to cut rates by as much as 100 to 150 basis points by year-end in an effort to shore up the US economy. While that is likely to undermine dollar strength, which would be rand supportive, it also gives the SA Reserve Bank (SARB) more scope to cut rates, though Els does not expect more than 50 basis points in domestic rate cuts this year.
"That will also support some rand recovery," Els said of the prospect of US rates being cut faster than domestic rates. "My year-end rand forecast is R17.20/$, but in the interim, it can be much stronger."
Nolan Wapenaar, co-chief investment officer (CIO) of asset manager Anchor, agrees that the GNU 2.0 will likely continue to involve both the ANC and DA, though he is less optimistic than Els on the rand.
"I think that the GNU is more likely to include some DA representation going forward," he says. "The market is taking comfort from this."
Wapenaar says Trump's decision to back down on his initial punitive tariff stance, which cuts import duties to 10% on most countries during his 90-day pause, will result in some gradual rand recovery. While he expects the local currency to remain volatile, he says it will likely end the year "closer to R19/$ than R19.50 at year-end".
Economic fallout
Johanna Kyrklund, group CIO at Schroders, describes Trump's tariff gambit as "a game of snakes and ladders", which not only darkens the global growth outlook but makes forecasting the policy response and asset prices difficult. With Germany having already announced a €500 billion (almost R11 trillion) fiscal stimulus plan before the Trump tariffs and China also considering measures to stimulate its economy, Kyrkland says there could be divergent economic outcomes.
"Tariffs are generally deflationary for Europe so we expect rate cuts to be accelerated there," said Kyrkland. "The situation is more complex in the US due to the short-term inflationary impacts of higher import prices, so we expect the Federal Reserve will be slower."
However, with US consumer inflation having eased to 2.4% year-on-year in March, down from 2.8% in February and lower than Wall Street expectations of around 2.6%, the case for eventual Fed rate cuts is growing.
"This report marks a clear pivot in the inflation narrative, and markets are likely to begin pricing in a higher probability of rate cuts heading into mid-2025," Kristof Kruger, a senior fixed income trader at Prescient Securities, said of the latest US inflation data.
Even so, Kruger cautioned that the Fed will likely proceed with caution until it has more confirmation that the easing US inflation trend is durable.
Rand Merchant Bank currency strategist John Cairns says the Fed will remain sensitive to the impact of tariffs on the US economy as well as inflation given its dual mandate, which requires it to target maximum employment and price stability. Cairns says while Trump tariff concerns have created downside pressures to US growth and upside pressures to inflation, their longer-term net effect will exert greater influence on the economy, prompting the Fed to cut rates faster than previously expected.
"Tariffs will be inflationary in the short-term but they have no longer-term inflationary impact - it's more of a once-off impact on prices," said Cairns. "So, the Fed is likely to focus more on growth. While some are saying the Fed won't cut at all, the broad consensus is that it will probably cut rates by June, and maybe even at the May meeting."
READ | Trump tariff war: US recession looms, SA may be spared
Yet, despite the uncertain global backdrop, Cairns says probably around 50% of the rand's current bout of weakness is due to concerns over the GNU and SA-specific issues. While he says the rand will benefit from a longer-term de-escalation of tariff tensions and data that hopefully shows the damage from Trump's policy stance on the US economy hasn't been too bad, local events are also crucial.
"The best-case scenario is a reform-minded governing coalition in SA and economic data showing the damage from tariffs is only short term and that the US and other economies will bounce back," Cairns told News24. "If the governing coalition is one where the market can be sure that reforms will continue, then the rand could recover by probably 40c or more.
"But if there are any signs that the global economy is tipping into recession, then the rand is going to come under significant pressure," Cairns added. "Similarly, if the GNU includes more populist policy proponents, then we are likely to see foreign investors selling out of SA."
Mamokete Lijane, global markets strategist at Standard Bank CIB, also argues that uncertainty around the possible dissolution of the GNU is key to the rand's fortunes. But Lijane agrees with Cairns' assertion that global growth prospects are also critical. Lijane said:
Even if the ANC and the DA decide to remain in coalition, the recent fracas exposed the coalition's fragility, and we expect will result in a permanent rise in the risk premium priced in the rand.
"The global story, however, could still worsen. In the short term, the rand will likely continue to suffer as markets remain in a state of flux. The tariffs imposed on the globe are higher and more extreme, and trade will suffer. This trade channel could undermine the value of the rand for the next six to 12 months."
