Rand Outlook: Stability and Strength Expected as Domestic Factors Improve

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The South African Rand is set to strengthen in 2025, buoyed by improving domestic economic conditions, according to a report by Nedbank CIB.

Factors such as a better trade balance reduced political uncertainty following the 2024 elections, and stronger growth prospects are expected to bolster the currency despite its recent challenges against the robust U.S. dollar.

ZAR has demonstrated resilience against many emerging market and developed market commodity currencies despite facing declining against the U.S. dollar, according to a recent report by Nedbank.

Walter De Wet, the report's author, says although the Rand appears weak, it is primarily the strength of the USD that has dictated the narrative since December."

De Wet places Rand's fair-value range against the dollar between 17.00 and 17.50 over a 6-to-12-month horizon, noting, "Economic conditions, including an improved trade balance, stronger growth prospects, and reduced political uncertainty post-2024 elections, favor a stronger currency from current levels."

Despite trading near 18.90 against the USD, De Wet underscores that the Rand has not reached "extreme weakness," defined as 20.00 to 20.50. He asserts, "Our conviction to buy the Rand and sell the USD would be high if these extreme levels were reached."

Technical analysis suggests that the 18.90–19.00 range serves as a critical support level. A breach could lead to further weakness towards 19.20, while holding this level could see the Rand strengthen, with targets as low as 17.40, aligning with its fair value.

The options market assigns a 78% probability that the Rand will trade between 17.50 and 20.50 in the next three months, with De Wet noting a bias toward the lower end of this range. He concludes optimistically: "We expect the USDZAR to eventually break lower, reflecting South Africa's improving macroeconomic fundamentals."

This outlook is supported by factors such as stronger domestic growth prospects, an improved trade balance, reduced political uncertainty after the 2024 elections, and lower oil prices. Additionally, De Wet notes that the Rand is likely to benefit from South Africa's real bond yields adjusting higher if necessary, acting as a counterbalance to global pressures.

An optimistic domestic outlook rests on:

Better Domestic Growth Prospects: The outlook for economic growth in South Africa has improved compared to the previous year, with GDP growth expected to reach 1.6% year-on-year in 2025.

Improved Trade Balance and Current Account Balance: South Africa's trade and current account balances are in a better position, supporting a stronger currency.

Lower Oil Prices: Reduced oil prices are expected to alleviate pressure on the current account and inflation, indirectly benefiting the Rand.

Reduced Political Uncertainty: Following the 2024 elections, the domestic political environment is seen as more stable, which typically enhances investor confidence in the currency.

Supportive Interest Rate Differentials: A favorable repo rate spread between South Africa's Reserve Bank and the U.S. Federal Reserve makes the Rand more attractive compared to 2023.