Rand Tumbles, Hit by Political Rift and Trump Tariff Threats

The South African rand plunged to its steepest decline against the dollar in two weeks, amidst widening political divisions within the country's governing parties and heightened concerns over U.S. President Donald Trump's tariff threats.

Outflows from South Africa's local asset markets persisted, despite the nation offering higher yields than many peers. This exodus is partly attributed to fears that the unity government that boosted investor confidence may falter, according to Warrick Butler, head of foreign-exchange trading at Standard Bank Group Ltd.

Tensions escalated last week when the Democratic Alliance declared a dispute within the coalition government, shortly after President Cyril Ramaphosa approved a law facilitating the state's expropriation of land. The party condemned the African National Congress (ANC) for violating procedures outlined in a coalition agreement forged last year.

"The signing of the expropriation bill appears to have surprised some partners, and the market abhors uncertainty," Butler noted.

As of 1:50 p.m. in Johannesburg, the rand had depreciated by 1.5% to 18.6678 per dollar, marking the worst performance among 23 major emerging-market currencies tracked by Bloomberg.

Foreign investors have liquidated a net 20.7 billion rand ($1.1 billion) from South African stocks since the year's inception, as per data compiled by Bloomberg. As of September 2023, speculative accounts held the largest net short-rand contracts, based on data from the Commodities Futures Trading Commission.

The ANC's support in the May national elections fell below 50% for the first time since 1994, necessitating the formation of a coalition including the business-friendly DA. This move reassured investors, prompting the rand to reach a 13-month high before partially relinquishing its gains following Trump's election victory in November.

The rand rallied again after the inauguration last week as investors initially downplayed Trump's tariff threats. However, the recent spat with Colombia has overturned those optimistic projections.

The U.S. President threatened tariffs against Colombia to secure an agreement on returning migrants, sparking concerns that he may employ the same strategy against other countries. The U.S. is South Africa's second-largest trading partner, and the rand is often viewed as a proxy for risk appetite in emerging markets.

"Monday's rand decline largely reflects the volatility in response to Trump's recent rhetoric," stated Henrik Gullberg, a macro strategist at Coex Partners. "Any factor that jeopardizes the positive economic narrative in South Africa is detrimental."