With current market pricing below estimated fair value as well as foreign capital allowance limits for South Africans, the Rand offers reasonable value to increase offshore exposure.
At the start of 2025, the US dollar was overvalued by more than 25%, trading at USD1.04/EUR. It subsequently corrected by an initial 8%, mostly in response to President Trump’s trade policy agenda and the economic uncertainty that was created. However, it then weakened by a further 3% in response to the Federal Reserve becoming less concerned about the upside risk to US inflation and more concerned about the downside risk to the US labour market. Consequently, the Federal Reserve resumed their interest rate cutting cycle in September 2025 after pausing for 8 months, which supported the Dollar’s weakening bias. Year-to-date the Dollar has depreciated by 10.3% against the Euro and is trading in a narrow range around USD1.15/EUR.
The US dollar weakness has during 2025 has, in general, been beneficial for emerging market currencies, particularly those currencies that were undervalued prior to Trump’s election, which would include the Rand. Year-to-date, the emerging market currency index has gained 7.8% against the Dollar, while the is up 8.4%.
At the start of the year, SA’s economic backdrop was awash with negative sentiment. This included concerns about the stability of SA’s fiscal position, and the impact of the 30% import tariffs imposed on South Africa by the Trump administration in April. While the Rand strengthened in the first four months of the year, this was primarily on the back of US dollar weakness. However, as the year developed, a couple of important factors have combined to improve South Africa’s economic fundamentals. These include:
• South Africa’s economic growth rate has been revised higher in the second half of the year. This is due to increased economic activity in Q2 and some buoyancy in consumer activity.
• South Africa’s consumer inflation rate has surprised consistently on the downside during the past 10 months, averaging a mere 3.1% over the past 12 months.
• The South African Reserve Bank announced a new inflation goal of 3% and it appears very likely that National Treasury will formally endorse a new inflation target.
• South Africa’s tax revenue collection during 2025/26 is on track to exceed budget, with all the major tax categories either matching or exceeding budget.
• Government expenditure has been controlled and is currently running slightly behind budget, despite significant demands on Government ahead of the local government elections.
• South Africa has exited the FATF Grey list after 33 months, which should make it easier to attract foreign investment.
• Foreigners have bought back into South African government bonds with the combined inflows in August and September ($4.45 billion) exceeding the inflows recorded over a 2-month period since the data series started.
• S&P has had South Africa on a positive credit rating outlook for a year and might be convinced to upgrade SA on Friday, 14 November, given SA’s improved fiscal position.
• Despite the 30% import tariff imposed on South Africa by the US, South Africa’s exports to the US year-to-date are only marginally behind the corresponding period last year. Furthermore, SA’s exports to the US during August and September was up 15.7% compared with the corresponding period in 2024.
• South Africa’s terms of trade have improved considerably in the last year due to a combination of a lower oil price as well as a higher gold and platinum price.
• It does appear that the revaluation of the GEFCRA balance could lead to additional transfers from the SARB to National Treasury.
While the list of recent positive economic developments is encouraging, most of them are well understood and should, therefore, be mostly in the price. Added to which, if these positives lead to a substantial uplift in economic growth, South Africa will tend to draw in more imports, placing downward pressure on the Rand.
Overall, the Rand appears to be supported, although further sustained strength appears somewhat unlikely unless there is another step-change improvement in SA’s economic fundamentals. Equally, a significant downward correction is also unlikely unless South Africa experiences an economic shock. The net result is that the Rand appears to be set for a bit more stability with a slight weakening bias.
The Advantage Currency Decoder estimates fair value at R17.90/USD. This is supported by the above fundamental reasoning. With current market pricing as well as foreign capital allowance limits per calendar year for South Africans, the Rand offers reasonable value to increase offshore exposure.
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