Introduction:

The provided sources offer insights into the intricate relationship between global trade tensions, primarily stemming from U.S. trade policy, and their significant influence on currency markets and various national economies. The material explores the recent weakness of the U.S. dollar and the challenges faced by currencies like the South African Rand, while also highlighting the impact of central bank decisions, such as the expected ECB interest rate cut. Ultimately, the sources examine the current state of the South African economy, detailing its struggles in key sectors and the interplay of domestic policy uncertainty and international economic conditions.

Key takeaways from sources:

U.S. Trade Policy is a Dominant Global Factor: The trade war waged by the Trump administration and its erratic tariff threats are central to the economic and market discussions in the sources. Initial steep tariffs caused global alarm and market turmoil. The White House later paused the heaviest tariffs for 90 days to pursue trade deals. The administration is now racing to meet a self-imposed deadline for negotiations, asking countries for their “best offers” by Wednesday. U.S. duties on imported steel and aluminum are set to double, and the legality of tariffs is uncertain due to conflicting court rulings. The administration intends to continue the tariff program by any legal means. This trade uncertainty creates a challenging backdrop for central banks and businesses and is seen as damaging the U.S. economy.
The U.S. Dollar is Weakening: The U.S. dollar has fallen to a six-week low against a basket of major currencies. This weakness is primarily attributed to signs of fragility in the U.S. economy resulting from the trade war and poor U.S. manufacturing data. Fiscal worries, such as the projected increase in federal debt from a proposed tax cut and spending bill, also contribute to a “sell America” theme negatively impacting dollar assets like stocks and Treasury bonds.
The European Central Bank is Expected to Cut Rates: The ECB is widely anticipated to cut its interest rates by a quarter point to 2.0% later this week. This decision comes despite recent inflation figures being higher than expected, as forecasts suggest a slowdown. U.S. tariff uncertainty is a factor the ECB must consider, as it impacts business activity and the outlook for inflation.
South Africa’s Economy Faces Significant Headwinds: South Africa’s economy is projected to show near-zero growth in the first quarter of 2025, following a modest expansion that narrowly avoided recession in the previous quarter. Key sectors like mining, manufacturing, and electricity production are struggling. The manufacturing sector, in particular, is in contraction for the seventh consecutive month, as indicated by the Absa PMI falling below 50.
Domestic and International Factors Weigh on South Africa: The weak growth outlook in South Africa is driven by lingering doubts over the national budget and domestic policy uncertainty, as well as the potential disruptions from shifting global trade policies.
Agriculture is a Bright Spot in South Africa: Despite the broad economic struggles, agriculture is expected to be the standout performer in the first quarter of 2025. This is supported by favorable weather conditions and positive crop estimates.
The South African Rand is Weak Due to Domestic Issues and Commodity Prices: The Rand’s slight weakness against the dollar is primarily driven by internal South African factors. These include cautious fiscal and domestic policy communications that haven’t fully eased market concerns, and a notable decline in gold and platinum spot prices, which reduces export revenues and sentiment towards the currency. The USD/ZAR pair is trading in a narrow range, suggesting market participants are in a “wait-and-see mode”.
Business Sentiment in South Africa Shows Cautious Optimism: Despite the ongoing manufacturing downturn, business sentiment in South Africa improved significantly in May. This optimism is attributed to the suspension of U.S. global tariff hikes and hopes for a resolution of domestic political disagreements within the Government of National Unity.

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Sources referenced:

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