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The strength of the rand is both a critical and a complex issue for private investors on the JSE. Our currency is influenced by two primary forces:
- Our local economy’s prospects
- The rand’s role as a leading emerging market currency
These, in turn, are mostly a function of international investors’ perceptions - firstly of local political and economic developments and secondly of the broader level of risk existing in world markets at any point in time.
Local financial journalists often do not consider the impact of international sentiment on the rand. They typically attribute major moves in the rand/US dollar exchange rate to local events and ignore the effect of shifts from risk-on to risk-off or vice versa on the world stage.
International investors are drawn to emerging markets by the high returns that they offer. For example, in South Africa, the effective yield on a 10-year government bond is currently around 10,4% and the inflation rate is 2,7%, giving a real return of 7,7%. This compares with the US 10-year Treasury Bill, which offers an effective yield of about 4,4% with an inflation rate of 2,3%, giving a real return of just 2,1%. So, an international investor can triple his return by buying SA bonds rather than US bonds.
Against that, the perceived risk of investing in emerging market bonds is far higher than it is with American bonds. Sentiment among international investors oscillates between greed (risk-on) and fear (risk-off). When they are fearful, they withdraw from emerging markets and put their money into safer assets like US treasury bills or gold, but when they are feeling optimistic, they put their money into emerging market assets with a high real return.
Because the rand is one of the most liquid and freely traded of the emerging market currencies, it tends to act as a proxy for all emerging markets. For this reason, the shifts from risk-on to risk-off and vice versa have a disproportionate impact on our currency.
Wall Street, as represented by the S&P 500 index, is also impacted by the shifts in international sentiment from risk-on to risk-off and back again. So, during periods of risk-on, you can expect both the rand and the S&P to strengthen. Usually, the rand strengthens first, making it a useful leading indicator.
Consider the chart below of the rand/US dollar exchange rate:
Chart by Trading View.
This chart (https://www.forexforecasts.co.za/resources/live-charts/) by Trading View shows the tick-by-tick progress of the rand against the US dollar. You can see here the sharp move to risk-off that occurred as a result of Trump’s Liberation Day announcements on 2nd April 2025. The rand fell rapidly to almost R20 to the US dollar as international investors fled emerging markets and bought safe-haven assets like first-world treasury bills and gold.
Then, from 9th April, as Trump began to back-track on his absurd tariff policies, the rand began to strengthen. Technically, you can see that the chart shows a relatively rare double head-and-shoulders formation, which is bullish for the rand and bearish for the US dollar.
On Friday (16-5-25), the rand moved back to R18 to the US dollar and shows every sign of breaking below this level.
In the background, of course, has been all the local political noise about difficulties within the government of national unity (GNU) and the third iteration of our National Budget. But these issues have paled into insignificance when compared with developments on the world stage.
In our view, the rand will continue to strengthen, indicating that Wall Street will also strengthen. In our view, the S&P 500 will soon break to the new all-time record high - which is something that we predicted in our tweet on 13th March 2025 when we said, “We continue to believe that the bull will continue” – and then a few days later on 17th March we tweeted, “We believe that the rand will strengthen further indicating a switch back to risk-on”.
