Rand Outlook: awaits the US tariff finalisation

The rand is flat to weaker against the major currencies since the start of the year, with the exception of the US dollar, and indeed driven more by US dollar weakness and US trade policy announcements than the usual impact of US interest rate cycles.

The US dollar has weakened by 10.5% since the start of the year on market concerns over US tariffs on US growth, inflation and the US economy in general, as well as on global growth, but the rand has only gained by 7.0% against the US dollar.

For the rand to counter the US’s 10.5% weakness in the US dollar it would need to reach R17.05/USD but instead saw some depreciation on its own against the US dollar, as the rand has not been strong this year.

With the 1st of August next week for the end of US trade negotiations, some extensions could occur for f the US’s largest trade partners who do not have a trade deal yet, such as the EU, Canada, Mexico, Brazil and India.

Minor trade partners, whose exports to the US will have little effect on US growth and inflation are at risk of not receiving a negotiation extension, and instead seeing threatened tariffs implemented, weakening their exchange rates.

The majority of SA’s exports to the US are precious metals (34%), vehicles and aircrafts (17.3%, and iron and steel (16.6%). Agricultural exports to the US are 4.6% of total exports to the US, rising to 7.8% if prepared foodstuffs are included.

With South Africa’s GDP growth already weak, at 0.5% for 2024 and 0.1% for Q1.25, excluding the strong production in agriculture in the quarter taking it to -0.3% qqsa, a drop in exports will negatively affect growth.

If SA sees a 30 to 40% tariff imposed next week the full effect on its 8% export to the US versus total exports, less the 37% exempted could reduce GDP by at least -0.2%, depending on the final tariffs applied, and when the full effects come through.

A reduction in exports reduces trade revenue inflows into the country and so negatively affects the exchange rate, as less US dollars are earned and exchanged into rands. Sa is seeking new market opportunities, but this takes time.

Weak economic growth for South Africa has been priced in, along with slow consolidation of SA’s state finances, while inflation is low and expected to only rise modestly, while a lower inflation target would be expected to boost rand strength and add to its stability.