Monthly Rand Report: The Rand faces a turbulent start to 2025

At the start of the year, the South African Rand weakened as traders and economists grew increasingly concerned about the potential threat of tariffs from Donald Trump, newly elected as US President. However, during Trump’s inauguration, markets were temporarily optimistic as he did not immediately impose tariffs, which led to a short-term strengthening of the ZAR.

Read more: Forex 2024 – Trends, challenges and predictions for the year ahead

The currency looked stable until the South African government passed the Land Expropriations Act, sparking significant opposition from the Government of National Unity (GNU) members. This political uncertainty caused the ZAR to weaken as markets reopened on Monday, 27 January.

Adding further potential volatility, key interest rate decisions were on the horizon: the US Federal Reserve maintained a forecasted 4.5%, followed by South Africa's interest rate decision on 30 January. The rate came in at 7.5%, down from a previous 7.25% but in line with predictions. These events will likely shape the ZAR’s trajectory in the coming days.

US economic data and what it means for the Dollar

The latest US economic data highlights a robust but mixed economic environment with key implications for foreign exchange markets. Non-farm payrolls in December surged to 256,000, significantly above forecasts, and the unemployment rate dipped to 4.1%. Inflation data showed annual rates aligning with expectations, with the core inflation rate at 3.2% and the overall rate at 2.9%. Retail sales moderated to 0.4% growth, and durable goods orders underperformed, declining by 1.1%.

The Fed maintained the interest rate at 4.5%, with markets closely watching the upcoming Q4 GDP growth rate, forecasted at 3%, and personal consumption data. This data reflects a balancing act between sustained growth and inflationary pressures, influencing the US Dollar's performance in the foreign exchange markets.

Impact of US economic performance on the ZAR

This data will likely exert downward pressure on the Rand due to its implications for global risk sentiment and US Dollar strength. The robust US labour market and resilient services sector, coupled with inflation aligning with expectations, support a narrative of continued economic stability in the US. This bolsters the Dollar as a safe-haven currency, potentially attracting capital flows away from riskier emerging market currencies like the ZAR.

Additionally, the Federal Reserve's decision to hold interest rates steady at 4.5% reinforces the Dollar's appeal, particularly if markets anticipate that rates will remain elevated for longer. Since the market is expecting the South African Reserve Bank to cut interest rates, this will further diminish the appeal of the Rand due to the carry trade potential of the currency. In effect, the interest rate differential between the countries decreases and the ZAR becomes less attractive. If global investors adopt a risk-averse stance or prioritise US assets, the ZAR could weaken further against the Dollar. However, any signs of softening in US data or dovish Fed signals in the future could provide temporary relief for the ZAR.

UK economic outlook and its implications

For the United Kingdom, December's annual inflation rate eased to 2.5%, slightly below expectations, suggesting moderating price pressures. November GDP showed marginal growth of 0.1% month-on-month but slower annual growth at 1%. Retail sales disappointed in December, contracting by 0.3% month-on-month, while the unemployment rate ticked up to 4.4%. Consumer confidence in January weakened sharply to -22, reflecting pessimism among households.

The mixed economic data from the UK may suggest a slowdown in the UK economy. This could pressure the Bank of England to adopt a more benign stance on interest rates, potentially weakening the British Pound. For the ZAR, a weaker GBP might initially strengthen the currency in the GBP/ZAR pair, but broader implications depend on global market dynamics. If the UK's weaker economic performance leads to heightened risk aversion, emerging market currencies like the ZAR could face pressure, as investors may shift to safe-haven assets.

On the other hand, if the data encourages more capital flows into higher-yielding emerging market currencies, the ZAR could benefit. The net effect will largely depend on how global markets perceive the UK data in relation to other economic developments, such as US monetary policy and South Africa's domestic factors.

South African economic data and policy decisions

South Africa's recent economic data paints a mixed picture, influencing foreign exchange market dynamics. December's S&P Global PMI dipped below 50 to 49.9, signalling contraction, while foreign exchange reserves decreased slightly to $65.46 billion. Manufacturing production saw notable declines both monthly (-1.1%) and annually (-2.6%), with mining production also showing mixed results. Gold production dropped sharply by 11.5% year-over-year.

Inflation for December remained subdued, with the annual rate at 3% and core inflation at 3.6%, below expectations. Retail sales were a bright spot, growing 7.7% year-on-year while building permits fell 2% annually. The recent interest rate decision (7.5%), alongside a weakening budget balance and the trade surplus of R34.7 billion for December, is expected to impact the ZAR as markets weigh South Africa's economic trajectory against global conditions.

ZAR volatility and looking ahead

In conclusion for January, the Rand experienced notable fluctuations against major currencies. The USD/ZAR pair reached a high of R19.20 and a low of R18.33 during the month, reflecting volatility in the currency pair. Similarly, the GBP/ZAR recorded a high of R23.61 and a low of 22.71, highlighting a similar trend of instability. These movements underscore the ZAR's sensitivity to global and domestic economic factors. Additionally, Ramaphosa’s signing of the Expropriation Bill has resulted in the Rand creeping up again to the high we saw at the beginning of 2025. Lastly, we will see the effects of both the United States and South Africa’s respective interest rate decisions on the ZAR in the coming days.

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