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The rand’s best level last week was R18.42/USD, averaging R18.72/USD over January. US core PCE inflation (the Fed’s preferred measure of inflation for its implicit target of 2.0% y/y) came out unchanged, and as expected, at 2.8% y/y.
In November last year we changed the rand’s forecast trajectory after the US election outcome, ending 2025 at R17.60/USD instead of R16.50/USD and also altering the forecast to R17.50/USD by end of 2026, instead of R15.60/USD.
In December, the FOMC pushed up its inflation forecasts on expectations of US tariff increases, and also uncertainty around this, causing markets to cut back on interest rate cut forecasts, and so resulting in US dollar strength and rand weakness.
US dollar strength on risk aversion saw the rand weaker, with targeted tariff increases expected, which caused the substantial revision of the rand forecasts noted above. A modest further adjustment has occurred as some increases have been announced
Specifically, 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 on the both illegal drug and immigrant flows into the US.
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 under way, and seeing the rand temporarily exceed R19.00/USD, as volatility in the domestic currency persists.
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.
The US also signed in more tariffs for China as well (10%), but China is reported to have said that it will file a lawsuit with the World Trade Organisation for “wrongful practices” as it believes it has counternarcotics cooperation with the US.
The White House notes “(d)uring his first term as President of the United States, President Trump established the President’s Commission on Combating Drug Addiction and the Opioid Crisis and declared the Opioid Crisis a public health emergency.”
US “trade accounts for 67% of Canada’s GDP, 73% of Mexico’s GDP, and 37% of China’s GDP, it accounts for only 24% of U.S. GDP. However, in 2023 the U.S. trade deficit in goods was the world’s largest at over $1 trillion.”
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.
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About the author
Annabel Bishop
Chief Economist of Investec Ltd
Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.
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