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We talk possible 25 basis point rate cut from the SARB and what that means for the Rand, current factors effecting the ZAR and what to expect.

💹 Major Currency Snapshot:

USDZAR: 18.22
EURZAR: 20.70
GBPZAR: 24.32

Introduction:

The discussion centers on the complexities of the current global economic landscape, heavily influenced by US-China trade tensions and the resulting tariffs which are impacting global trade, investment, and growth forecasts for various countries. Analysis of specific regional situations, such as the South African economy, its currency dynamics (the Rand), and the interplay of domestic political uncertainty, inflation trends, and monetary policy responses, against this global backdrop.

Key takeaways from sources:

US-China Trade Tensions are a Major Global Economic Factor: The sources emphasize that trade tensions, particularly between the US and China, are significantly impacting the global economic landscape. US President Trump’s focus on tariffs and a desire to bring back industrial activity and manufacturing jobs to the US are central to this.
Tariffs Disrupt Trade and Weaken Growth: Tariffs, including Trump’s universal tariffs and high sectoral tariffs, are weighing on global trade and investment decisions. This disruption is forcing companies to cope with supply chain changes and is leading to downward adjustments in economic forecasts for various countries. Policy uncertainty stemming from these tensions also negatively impacts consumer, business, and financial activity.
Markets React to Trade Talk Developments: Markets have shown sensitivity to news regarding US-China trade discussions. News of potential meetings between top trade officials has been met with cautious optimism and led to rises in US futures and Chinese markets, including Hong Kong stocks. However, the Chinese side has expressed guardedness, citing the need to “Listen to what is said, and watch what is done,” and stating they will not agree if the US uses talks to continue coercion or blackmail.
Asian Currencies Face Pressure from Trade War: The global trade war challenges Asian policymakers, especially regarding how much currency appreciation they can tolerate. While some Asian currencies recently surged against the dollar, appreciation makes exports less competitive. Traditionally, depreciation would be a tool to mitigate export shocks, but this option may be less viable now. President Trump has argued that Asian countries have kept their exchange rates artificially weak.
China is Using Monetary and Fiscal Measures to Support Growth: China has flagged interest rate cuts and expanded channels to direct money into the stock market to stimulate its economy. These actions were cheered by investors, although some desired more fiscal spending. The Chinese government is also expected to continue implementing fiscal stimulus and investing in industrial technological development, particularly in new and green technologies, despite the external environment.
The Global Investment Regime is Shifting: The sources describe a major shift in the investment regime driven by a rejection of the previous consensus focused on fiscal rectitude, loose monetary policy, and globalization. A new, populist political consensus is emerging, favoring proactive fiscal policy, protectionism, and anti-immigration. This change is linked to the feeling that the previous model “didn’t work for the majority of people in western democracies”. The current era is characterized as moving from a globalized regime with deflationary shocks to a deglobalized regime with inflationary shocks.
South Africa Faces Significant Growth Challenges: South Africa’s economy is currently hampered by sluggish growth, expanding only 0.6% in 2024 and projected at 1% for 2025, a figure some economists are skeptical of. The Bureau for Economic Research (BER) lowered its 2025 growth forecast due to domestic political instability and US trade tensions. Ratings agencies like Moody’s have also cut South Africa’s 2025 GDP forecast, linking it to expected slow global growth driven by tariff uncertainty. Sustained growth of around 3% is needed to address debt, unemployment, poverty, and per capita GDP.
Inflation in South Africa is Surprisingly Low: Counterintuitively to the weak growth, South Africa’s March inflation hit a five-year low of 2.7%, falling below the South African Reserve Bank’s (SARB) target range of 3-6%. Core inflation is also moderated. This low inflation provides room for potential monetary policy adjustments.
Political Uncertainty is a Major Headwind for South Africa: The stability and effectiveness of South Africa’s Government of National Unity (GNU) are significant concerns. Instability within the coalition and disputes over the national budget undermine investor confidence and decisive policy action needed for structural reform. Issues like the ANC’s continued dominance, its socialist ideology, controversial policies, and state incompetence/corruption also hamper progress.
SARB May Consider a Rate Cut: Given the below-target inflation and weak growth, the SARB may consider a 25 basis point reduction in the key rate at its May 29 meeting. However, this is described as a “close-call,” with the central bank needing to monitor global factors like trade tensions and currency weakness that could reignite inflation.
Infrastructure Challenges Persist in South Africa: Operational issues like persistent power cuts (loadshedding) continue to be a concern. While loadshedding was suspended in mid-April, it has the potential to return, especially during winter, and could reignite inflation. These constraints are a significant headwind to economic activity and growth potential.
The South African Rand Shows Resilience but Faces Risks: The Rand (ZAR) is currently trading with moderate stability against the US Dollar, showing resilience despite structural economic challenges. Technical analysis suggests potential for modest appreciation in the coming weeks. However, its performance is influenced by both domestic factors (inflation, growth, politics, SARB decisions) and global dynamics (risk sentiment, US data, geopolitical developments). Structural weaknesses limit its potential for substantial appreciation.

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Sources referenced:

Share This PFS Market Sentiment Update