The South African rand kicked off the week with notable momentum, rebounding and strengthening below the critical R19-mark against the US dollar on Monday.
The enthusiastic market response came as fears of a potential collapse of the Government of National Unity (GNU) appeared to abate, notably complemented by a temporary suspension of US tariffs that has given the currency a much-needed boost.
US President Donald Trump last week authorised a 90-day pause on steep Liberation Day import tariffs for about 75 countries that trade with the US, but raised them to 145% for China.
Gold also eased 0.8% fell to around $3 200 per ounce on Monday, retreating from an all-time-high as trade tensions after an intense wave of safe-haven buying amid a deepening trade war between the US and China drove the bullion to a record $3 245 per ounce.
On Monday, the rand strengthened by more than 1.4% to R18.86 against the US dollar, marking a significant shift from alarming near historic lows of R19.82/$1 recorded just a week prior.
Similarly, it fortified its position against the British pound, appreciating by 0.6% to R24.86, a reflection of the ongoing weaknesses in the dollar, alongside positive political developments. The last time the rand saw such a peak was in early April.
Bianca Botes, director at Citadel Global, said the markets were responding positively to the political developments, with the JSE All Share Index rising 1.9% to 88 052 index points on Monday.
“The rand is on a firmer footing after the past two weeks’ weakness as some risk has dissipated on the global landscape and GNU talks have been described as constructive,” Botes said.
Over the weekend, parties within the GNU held talks in a bid to resolve the fiscal standoff after the Democratic Alliance rejected the proposed 0.5 percentage point hike in the value-added tax (VAT).
The ANC is reportedly backing away from the VAT increase amid mounting pressure from its coalition partners in the GNU, despite passing the national budget in Parliament with a narrow margin with support from smaller GNU members.
On Saturday, the ANC said it was committed to the GNu and the challenges that it had faced with the passing of the budget were “matters that are under discussion”.
“If it so happens that the impasse is not avoidable in the process of negotiations and talks, it means that will then result in other processes and discussions,” said the ANC.
The DA reiterated its position that a VAT increase was unaffordable in the absence of meaningful reform that will increase economic growth and create jobs.
The inability for compromise over a budget that works for all political parties saw very severe market volatility, as key members in the ANC sought the DA’s summary ejection from the GNU, and the ANC overall sought to dictate the coalition’s terms.
Investec chief economist Annabel Bishop said the improvement in the relationship recently between key political parties in the GNU has seen the prevailing high political risk premium weaken, strengthening the rand.
Bishop said that globally, the extreme weakness of the US dollar would normally have pushed up the value of the rand at the cross significantly, however, the difficulties faced in the GNU last week caused very severe market concerns, and a collapse in the rand instead.
“The US dollar continues to slide to multiyear lows, causing other currencies such as the euro to also gain against it, to recently 1.15/EUR from closer to 1.07/EUR at the start of the month, although the euro has gained in its own right too,” Bishop said.
“The negative impact of the trade war on commodities prices has also had a depreciating effect on the rand, as the domestic currency was hit from many sides.
“The rand was at R18.12/$1 before the impact of the US liberation day tariffs and threat to the inclusion of the DA in the GNU and has since stabilised then strengthened as market confidence improved, although not recovered completely.
“Worries over a recession in the US persist, causing safe haven gains from gold, although further tariff exceptions have come through on semiconductors, as the US tariff environment remains fluid, but has seen some marked window from 2nd April.”
BUSINESS REPORT