Rand strengthens below R17,70 amid budget optimism and a softer dollar

The rand is testing levels below R17.70 to the dollar on a range of factors that include persistent greenback weakness, renewed local confidence following the passage of the third iteration of the National Budget, as well as hints that the inflation target may be dropped to 3% instead of the current 3% to 6% range.

Having opened at R17.77 on Monday morning, it continued to trade around that level for the bulk of the day and was at R17.73 as of around 2.30pm. It was last at these levels around mid-December last year.

Bianca Botes, director of Citadel Global, explained that the weakening of the dollar has been the biggest short-term driver for the rand. “When the dollar weakens, often due to softer US economic data or expectations of US interest rate cuts, the rand tends to strengthen,” she said.

So far this year, the rand is 5.7% stronger against the dollar, leading the emerging market currency charge, said Botes. The dollar index is softer by 6.6% over the past six months, indicating the broad-based weakness of the currency, she added.

Yet, Investec chief economist, Annabel Bishop, stated that the local currency was not gaining ground against the euro and pound. “US dollar weakness has been driven by the volatility in US tariffs and uncertainty for the US economy and so global growth, as the US has hiked tariffs steeply then paused, or rolled them back, then re-embarked on tariff increases again in April,” she said.

Nolan Wapenaar, co-chief investment officer at Anchor Capital, said that, “perhaps most tellingly,” the weaker greenback, further de-escalation of the tariffs given recent trade talks as well as less political risk will help the local currency.

Botes also noted that, as a commodity linked currency, the rand is sensitive to global product prices. “The prolonged and drastic gold rally, coupled with a weak oil price, assisted the terms of trade and underscored the rand’s strength,” she said.

Johann Els, Old Mutual’s chief economist, said that the rand is benefiting from the recent soothing of global trade tensions, the passing of the National Budget, easing of concerns that the DA won’t walk away from the Government of National Unity as well as higher prices of those commodities that South Africa exports when compared with relatively low price of the country’s main import of oil. 

Wapenaar explained that the rand has also strengthened because a “sensible budget was passed, and tariffs have been paused and softened”. 

The South African Reserve Bank’s (SARB’s) cautious approach to interest rates, cutting rates less aggressively than expected, has helped support the rand by maintaining a favourable interest rate differential with the US, said Botes. “Anticipated US rate cuts later in 2025 could further benefit the rand if local rates remain steady,” she added.

“We also note that the discussion of a 3% inflation target in South Africa is rand positive and should this progress, we will likely see further strength in the rand,” said Wapenaar. 

On announcing the decision of the Monetary Policy Committee to, as expected, drop the interest rate by 0.25 percentage points on May 21, SARB Governor, Lesetja Kganyago said that dropping the inflation target to 3% would result in South Africa being a low-inflation, low-interest rate country, which would bring with it economic growth. 

“The renewed focus on a lower inflation target is also helping as this will not only reduce pressure on the rand, but also lead to lower interest rates over time,” said Els, adding that this would be beneficial for the economy, while also aiding in fixing government finances. 

“I see further strength in the rand over the next few weeks and months, moving closer to R17, and potentially into the R16-handle territory on a short-term basis,” Els said. 

Bishop noted that the US dollar is expected to see further weakness this year, which would add to the rand’s strength against the greenback, and the moderate nature of consumer price inflation, with another fuel price cut due this month. “The rand’s strength against the US dollar this year has contributed significantly towards lower inflation in South Africa,” she said.

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