FX View – June 2025

Currency: The rand has been performing well and appears poised to remain strong in 2025. Easing US-China tensions, improved local politics, and lower-than-expected inflation in South Africa are all contributing to the currency’s strength.

The rand is now trading at a fair value, and with the US dollar likely to weaken, the rand could move closer to R17 per dollar.

More money flowing into South African bonds should also support the rand, as investors are drawn to higher returns in this market.

Overall, the trading range for 2025 is likely to remain between R17.50 and R18.50 per dollar, depending on global and local developments.

Inflation: Headline CPI rose marginally in April, to +2.8% y/y from +2.7% y/y in March, driven by higher food inflation. Core inflation, which excludes volatile food and energy prices, decelerated in April to +3.0% y/y from +3.1% y/y in March. The ZAR price of fuel rose slightly in May, but not enough to raise broader price pressures. This supports further low CPI readings going forward, allowing the SARB the perfect opportunity to lower the inflation target to 3%.

Repo rate: The SARB resumed its monetary easing cycle in May, cutting the repo rate by 25 basis points to 7.25%. The SARB also revised its inflation forecasts lower, now projecting 3.2% for 2025 and 4.2%-4.4% through 2027, citing a stronger rand, lower oil prices, and the scrapping of VAT hikes. However, growth expectations were downgraded, with 2025 GDP now seen at just 1.2%.

Government Finances: South Africa’s fiscal outcomes are expected to worsen in the 2025/26 fiscal year, with the latest Budget projecting a deficit of -4.8% as a percentage of GDP from -4.6% recorded in 2024/25. The key to turning around SA’s precarious fiscal position will be the implementation of structural reforms.

GDP Growth: SA’s GDP grew by just 0.1% q/q in Q1, slowing from 0.4% in Q4. Y/y growth held steady at 0.8%. Without a second consecutive quarter of robust agricultural growth (+15.8%), overall GDP would have contracted. Particularly concerning is the significant decline across the productive sectors as mining output and manufacturing shrank fell by 4.1% and 2.0% respectively.

Offshore conditions: In May, global financial markets experienced a robust rebound following the turbulence caused by the April tariff shocks. While trade tensions between the US and China eased, there are indications that tensions are escalating again as Trump accuses China of violating the trade agreement. In the US, longer-term Treasury yields rose significantly, reflecting investor concerns over unsustainable high levels of US debt, which looks set to increase by $2.4tn over the next ten years.

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