Introduction:

The US dollar is currently struggling, facing its longest losing streak since 2017, primarily due to concerns over potential increases in US debt from proposed tax cuts and unpredictable President Trump’s global tariff policies. This weakness in the dollar, combined with factors like a relatively high domestic interest rate environment and commodity prices, is providing some support to the South African rand despite underlying structural challenges. Investors are closely watching upcoming events such as the South African Reserve Bank’s interest rate decision, Nvidia’s earnings report, and speeches from Federal Reserve policymakers for further market direction.

Key takeaways from sources:

The US dollar is currently struggling significantly, facing its longest losing streak against a basket of currencies since 2017. This weakness is primarily attributed to investor concerns over the potential increase in US debt resulting from proposed tax cuts and the unpredictable nature of President Trump’s global tariff policies.
The US House-passed version of Trump’s tax-cut bill is calculated to add about $3.8 trillion to the federal debt over the next decade, leading to concerns about increased future Treasury issuance and contributing to negative sentiment towards US assets. Moody’s recent downgrade of the U.S. sovereign credit rating on May 16 also exacerbated these concerns. Some experts suggest erratic US policymaking indicates a weaker USD is the path of least resistance and that a long-term USD regime change might be in the making.
President Trump’s recent decision to delay threatened 50% tariffs on European Union shipments (restoring a July 9 deadline) provided some temporary relief to global markets, leading to gains in global stock markets and the euro. The euro rallied to a one-month high, and European Central Bank President Christine Lagarde suggested the single currency could become a viable alternative to the dollar. However, these policy reversals reinforce the unpredictability that undermines investor confidence.
There is a strong expectation among debt experts and economists for the South African Reserve Bank (SARB) to cut the repo rate by 25 basis points this week (Thursday), likely to 7.25%. This expectation is supported by low CPI inflation (2.8% in April), muted wage growth, and soft consumer demand, indicating monetary policy is currently restrictive. Market pricing also suggests a modest easing bias. A rate cut is seen as beneficial for consumers and the economy. However, some experts fear the SARB might hold rates steady due to global uncertainty, and the SARB remains relatively hawkish due to inflation history despite the current low CPI.
The South African rand (ZAR) has shown some recent resilience. This is attributed to a relatively high domestic interest rate environment and a commodity price tailwind, particularly from gold. The prevailing interest rate differential in favor of the ZAR offers support. The divergence between the SARB potentially easing and the Fed potentially easing later in the year is also seen as ZAR supportive. On Tuesday, the rand was trading around R17.88 to the dollar, after weakening slightly on Monday.
Despite the recent resilience, the rand faces significant underlying structural issues in South Africa that pose headwinds. These challenges include concerns about the Government of National Unity’s (GNU) economic policies, fiscal sustainability (especially regarding State-Owned Entities or SOEs), low growth, high unemployment, SOE inefficiencies, and significant external debt. There’s a risk that the market might be underestimating the potential for domestic political issues or a sudden global risk-off event to quickly undermine the rand. The sustainability of the current favorable environment for the ZAR is the key question.
Beyond US tariffs and the SARB decision, market participants are focused on several key upcoming events this week. These include Nvidia’s earnings report on Wednesday, expected to show a large jump in revenue, which will be watched for clues on the impact of US export curbs on AI chip sales to China. Also important are speeches from Federal Reserve policymakers and the release of the US core PCE price index data on Friday, which could offer clues on the US interest rate outlook. The OPEC+ meeting regarding crude oil output and a Bank of Japan conference focusing on global growth and inflation are also being monitored.

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Sources referenced:

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