The strength of the rand over the past year is a most topical subject amongst our clients. In this article, penned by Alison Barker (economist at Advantage FX Solutions), with additional analysis provided by seasoned investment professional Dr Lance Vogel, we illustrate that the dollar is currently trading at levels close to its long-term equilibrium against a basket of developed market currencies; delve into the factors that have weakened the dollar; and identify the events that could possibly lead to the unwinding of the rand premium going forward.
Geopolitical tensions and heightened global economic uncertainty were key determinants of currency performance in 2025
Over the year, the US dollar depreciated by a substantial 11.8% against the euro, with the majority of the weakness concentrated in the first half of the year. Notably, the “Liberation Day” tariff announcements on 2 April 2025 were significantly more aggressive than market expectations, triggering broad-based weakness across US assets, particularly the US dollar.
It is important to mention that the US dollar was significantly overvalued at the end of 2024 and, therefore, more vulnerable to the uncertainty associated with the Trump presidency. Chart 1 below shows the trend in the US Dollar Index (DXY) since its inception in the first quarter of 1973, and more importantly, that the current level is very close to its inception level of 100. The US dollar is by no means weak and is actually very close to its long-term equilibrium level. Event-driven trends in the US dollar spot index are far more important than seasonal measurement periods.
Chart 1: The US Dollar spot index – DXY
Source: Bloomberg
From a cyclical standpoint, heightened trade and economic policy uncertainty resulted in downward revisions to US GDP growth forecasts and prompted a shift toward a more accommodative stance by the Federal Reserve, reinforcing downward pressure on the dollar. This lower level was sustained in the second half of the year due to more secular concerns about the role of the US dollar as the global reserve currency and a questioning of the US’s economic status.
The extent of US dollar weakness, understandably, boosted emerging market currencies
Emerging market currencies, in aggregate, gained 9.5% against the US dollar in 2025. High-beta emerging market currencies (those more vulnerable to shifts in global sentiment) outperformed, and this basket includes the rand. The rand gained a substantial 13.4% against the US dollar in 2025 and was the 8th-best-performing emerging-market currency among the 22 emerging-market currencies we monitor.
Chart 2: Emerging market exchange rate vs US dollar
Source: Macrobond
At this point, we turn to the Advantage Currency Decoder to empirically extract (“decode”) the underlying determinants of the rand’s performance – whether it can be attributed to US dollar weakness, external, or South African-specific factors. The model is built on the assumption that currencies are all-knowing and discount positive or negative information on a highly efficient and dynamic basis. It uses a basic form of artificial intelligence through machine learning to mine or “decode” the information-rich exchange rate in a quest to determine a consistently reliable level for the fair value of an exchange rate relative to the US dollar at any point in time.
Using the estimate of the Decoder fair value level, the strength or weakness in the exchange rate can be computed at that point in time. This strength or weakness is called the fair value residual. The fair value residual is effectively what is left over in the exchange rate after the impact of the US dollar has been eliminated. In other words, the US dollar only drives fair value, and the residual is due to non-dollar effects.
Chart 3: Advantage Currency Decoder- USD/ZAR level relative to the estimate of fair value
Source: Dr Lance Vogel, Advantage FX Solutions
The rand’s appreciation relative to its estimated fair value in 2025 was underpinned by a combination of factors
Key drivers included a supportive external environment, a weaker US dollar, and highly favourable terms of trade, which were boosted by strong precious metals and commodity prices. Domestic factors also contributed, such as improving economic fundamentals, a stronger-than-expected fiscal outlook, the adoption of a new 3% inflation target, a credit rating upgrade from S&P, and removal from the Financial Action Task Force grey list. Additionally, ongoing policy reforms aimed at expanding public-private partnerships supported investor confidence, resulting in increased foreign portfolio inflows.
Chart 3 suggests that one needs to exercise caution in expecting a sustained trajectory of rand strength given overextended bullish sentiment. Ideally, one would look for guidelines on how quickly this premium in the Rand/US dollar exchange rate may unwind. For this purpose, the Decoder’s historical outcomes provide an anchor for fundamental reasoning. While mean reversion of the Decoder is clearly observable (Chart 3), the amplitude and duration of the residual vary significantly from event-to-event and are thus not predictable.
Chart 4: Decomposition of the residual in the USD/ZAR exchange rate
Source: Dr Lance Vogel, Advantage FX Solutions
Chart 4 indicates that by decomposing this residual into an aggregate emerging market effect and a South Africa-specific effect, we can assess whether it is primarily driven by broader emerging market currency trends, by South Africa-specific trends, or by a combination of both.
Chart 5: Duration on the South Africa-specific impact
Source: Dr Lance Vogel, Advantage FX Solutions
From the point of view of the South Africa-specific sentiment in the exchange rate, the period of “Ramaphoria,” for example, persisted for 193 days, while the previous commodity boom lasted 665 days. The formation of the Government of National Unity (GNU), coupled with improving economic fundamentals and the recent rally in gold and platinum group metals (PGM), has persisted for 577 days, interrupted only briefly for 30 days following Liberation Day. It is also very important to note how quickly the positive South Africa-specific sentiment can reverse and rapidly drive the exchange rate back to the fair value estimate.
The rand continues to benefit from current positive factors, though much of the support is derived from the gold and PGM rally
Commodity price performance has been notable, with iron ore up 16%, gold up 39%, and platinum up 121% since the end of May 2025. Since October 2022, gold alone has appreciated by an exceptional 181%.
A modest tailwind now also comes from aggregate emerging-market currency strength. It is interesting to note that, when we assess the rand against other commodity-producing emerging-market peers, the positive domestic factors discussed above did not lead to any relative outperformance.
From Chart 5, it also appears that the amplitude of negative South Africa-specific shocks to the exchange rate has declined over the past 10 years, implying that volatility levels from negative shocks have decreased.
What are the likely events on the horizon that could lead to the unwinding of the current rand premium?
A renewed strengthening of the US dollar would be the biggest risk to the current bullish outlook for the rand. Consensus expects the US dollar to weaken further in 2026, albeit at a modest pace. This outlook is driven by relative growth and interest rate differentials, heightened economic and political uncertainty, and fiscal concerns, including elevated levels of US government debt. However, upside risks to the dollar remain, particularly given the resilience of the US economy and the possibility that stronger growth could prompt the Federal Reserve to raise interest rates.
The rand is expected to consolidate and remain supported by a favourable global risk environment, strong terms of trade, and positive investor sentiment. Near-term focus will be on the National Budget in February and the priorities of the GNU. There is renewed business confidence that the GNU government could accelerate growth and business-friendly reforms, as well as improve services delivery. However, the Budget will need to show clear signs of government debt stabilisation.
The positive ratings outlook from S&P remains sensitive to any deterioration in South Africa’s economic performance. The recently released Purchasing Managers Index is still showing a struggling economy, reflecting delays in the implementation of reform plans. The rand is currently being supported by cyclical tailwinds and sentiment should remain positive in 2026. This has driven large foreign inflows into the bond market in the past 18 months. At the same time, renewed scrutiny of South Africa’s preferential trade access to the US under the African Growth and Opportunity Act (AGOA) introduces geopolitical risks that could weigh on investor sentiment.
Although commodity prices have strongly bolstered the terms of trade, the currency remains vulnerable to a reversal in this trend. Efforts to rebuild the country’s depleted infrastructure and technology base are likely to increase import demand, also potentially offsetting recent trade gains.
Finally, it is important to note that short-term currency performance is typically driven by momentum, investor sentiment, and risk appetite. This can persist or fade in the medium-term depending on cyclical factors such as interest rates and trade flows. Longer-term performance trends are driven by more secular or structural factors, which take time to be implemented and manifest in an exchange rate’s behaviour.
Source:
Alison Barker – Economist from Advantage FX Solutions
Dr Lance Vogel – Senior Investment Specialist from Advantage FX Solutions
