The repercussions of the rand breaking through R19/$ for the first time since late May 2024 last week could be dire for SA as the return of Donald Trump to the US presidency may lead to interest rates remaining higher than initially expected.
The local currency weakened to R19.21/$ after the US nonfarm payroll report on Friday showed the US economy added the most jobs since March in December, with the unemployment rate unexpectedly falling.
This development supports the case for a pause in rate cuts by the Federal Reserve and sent the dollar soaring.
According to David Rees, senior emerging markets economist at Schroders, emerging market currencies have faced significant challenges due to the strong dollar environment prevailing since Trump’s election victory.
“Expectations of continued US economic exceptionalism, coupled with concerns about potential tariffs, have contributed to this trend,” he said.
Rees noted that the rand has underperformed other emerging market currencies, partly due to the rise in global bond yields driven by increasing US treasury yields.
“This has exposed weaker sovereigns, and SA’s relatively poor debt dynamics make it vulnerable to fiscal concerns,” he said.
The Fed’s December monetary policy meeting revealed an upward revision in inflation forecasts for 2025, from 2% to 2.5%. That has sparked concerns the US central bank may implement fewer interest rate cuts in 2025, which in turn has bolstered the dollar.
Since the election, Trump has promised to immediately impose a 25% tariff on Mexican and Canadian imports, with increasing existing tariffs on Chinese imports 10%. On the campaign trail Trump said he would implement tariffs of 10%-20% on all imports.
Wichard Cilliers, director and head of market research at TreasuryONE, said the Trump trade policies implied that markets will be more cautious as uncertainty about scenarios in the next four years come to the fore.
“The market is skittish on the ‘What ifs and the maybes’, and this only increases the volatile nature of the market,” he said.
The IMF has also warned that jitters about Trump’s trade policies could drive up longer-term borrowing costs and add to pressures facing the global economy in 2025.
“It is uncertain how long this sell-off will persist. However, our consensus forecast for US growth, inflation, and interest rates suggests that the strong dollar and upward pressure on US treasury yields will continue for a while longer,” said Reese.
“A weaker rand will increase import costs and add to inflationary pressures. While headline inflation is expected to remain within the target range, the challenging external environment may lead the Reserve Bank and other emerging market central banks to exercise caution.”
For SA, one immediate consequence is that increased import costs will affect businesses and consumers. A weaker rand translates into higher costs for imported goods, particularly fuel and food.
Rising prices can lead to increased cost of living for consumers, potentially resulting in reduced discretionary spending and slower economic growth. Such trends also could have a direct impact on corporate earnings across various sectors. Moreover, rising import costs contribute to inflation, which may compel the Bank to raise interest rates in an effort to manage price stability.
While the weaker rand has the potential to aid SA exports, it increases the cost of imported inputs necessary for production.
Cilliers said if the rand remained weak for a prolonged period it will affect the inflation rate negatively, causing the Bank to hike interest rates.
“However, we first need to see what approach Trump will take when he gets into office and the policies he wants to enact before we can make a judgment whether the higher rand [to dollar ratio] will be sustained,” said Cilliers.
Correction: January 13 2025
This article has been corrected to say that while a weaker rand has the potential to aid SA exports, it increases the cost of imports.
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