The extent of US dollar weakness in 2025 boosted emerging market currencies. Emerging market currencies in aggregate gained 9.5% against the US dollar in 2025. High-beta emerging market currencies (those more vulnerable to shift in global sentiment) outperformed, and this basket includes the rand. The rand gained a substantial 13.4% against the US dollar in 2025 and was the 8th best emerging market currency of the 22 emerging market currencies we monitor.
The rand’s appreciation relative to its estimated fair value in 2025 was underpinned by a combination of factors. Key drivers included a supportive external environment, a weaker US dollar, and highly favourable terms of trade. Domestic factors also contributed, such as improving economic fundamentals, a stronger-than-expected fiscal outlook, the adoption of a new 3% inflation target, a credit rating upgrade from S&P, and removal from the FATF grey list. Additionally, ongoing policy reforms aimed at expanding public-private partnerships supported investor confidence, resulting in increased foreign portfolio inflows.
By decomposing this residual into an aggregate emerging market effect and an SA -specific effect, we can assess whether it is primarily driven by broader emerging market currency trends or by SA- specific trends or a combination of both.
One needs to exercise caution in expecting a sustained trajectory of rand strength given overextended bullish sentiment. Ideally, one would look for guidelines on how quickly this premium in the Rand/ US dollar exchange rate may unwind. The rand continues to benefit from current positive factors, though much of the support is derived from the gold and PGM rally.
What are the likely events on horizon that could lead to rand unwinding of this premium?
A renewed strengthening of the US dollar would be the biggest risk to the current bullish outlook for the rand. Consensus expects the US dollar to weaken further in 2026, albeit at a modest pace. This outlook is driven by relative growth and interest rate differentials, heightened economic and political uncertainty, and fiscal concerns, including elevated levels of US government debt. However, upside risks to the dollar remain, particularly given the resilience of the US economy and the possibility that stronger growth could prompt the Federal Reserve to raise interest rates.
The rand is expected to consolidate and remain supported by a favourable global risk environment, strong terms of trade, and positive investor sentiment. Near-term focus will be on the National Budget in February and priorities of the GNU. There is renewed business confidence that the GNU government could accelerate growth and business-friendly reforms, as well as improve services delivery. However, the Budget will need to show clear signs of government debt stabilisation. The positive ratings outlook from S&P remains sensitive to any deterioration in South Africa’s economic performance. The recently released Purchasing Managers Index is still showing a struggling economy, reflecting delays in the implementation of reform plans. The rand is currently being supported by cyclical tailwinds and sentiment should remain positive in 2026. This has driven large foreign inflows into the bond market in the past 18 months. At the same time, renewed scrutiny of South Africa’s preferential trade access to the US under AGOA introduces geopolitical risks that could weigh on investor sentiment. Although commodity prices have bolstered the terms of trade, efforts to rebuild the country’s depleted infrastructure and technology base are likely to increase import demand, potentially offsetting recent trade gains. The Advantage Currency Decoder suggests that the rand should revert back to fair value from current levels. With the exchange rate now at R16.42, the fair value estimate is at R17.83.