The Carry Trade Resurgence and the 16.60 Support Floor
South Africa’s rand is entering the final trading days of 2025 as the world’s most improved emerging market currency. Trading at 16.65 to the US dollar as of December 28, the currency has locked in a year-to-date gain of 12.1 percent. This represents the most significant annual appreciation since the post-financial crisis rebound of 2009. The mechanism driving this shift is not merely sentiment; it is a brutal compression of the South African risk premium. For ten years, investors demanded a massive yield to hold ZAR-denominated assets to compensate for structural rot. That premium has evaporated.
The primary engine is the carry trade. With the South African Reserve Bank (SARB) maintaining a repo rate of 6.75 percent following its 25-basis point cut on November 20, and the US Federal Reserve lowering its target range to 3.50-3.75 percent on December 10, the yield spread remains a lucrative 300 basis points. Arbitrageurs are borrowing in cheaper dollars to buy high-yielding South African Government Bonds (SAGBs), specifically the benchmark 10-year R2035, which saw its yield plummet from 11.4 percent in April to 8.24 percent this week.
Institutional Anchors and the 3 Percent Inflation Pivot
Monetary policy has undergone a fundamental structural shift. In November, Governor Lesetja Kganyago formally moved the SARB from a 3-6 percent inflation target range to a single-point target of 3.0 percent. This pivot, long sought by institutional investors, has anchored long-term inflation expectations. Per the November CPI report from Statistics South Africa, headline inflation cooled to 3.5 percent. Real interest rates are now sitting at a restrictive but credible 3.25 percent, a level that has successfully defended the currency against periodic bouts of global volatility.
The GNU Stability Dividend and Sovereign De-Risking
Political risk, which historically traded as a 200-basis point drag on the rand, has been mitigated by the survival of the Government of National Unity (GNU). Formed in June 2024, the coalition has navigated its first full fiscal year without a collapse, a milestone that triggered S&P Global Ratings to upgrade South Africa’s outlook to positive in November. This upgrade was underpinned by two critical factors: the removal of South Africa from the FATF Grey List in early 2025 and the stabilization of the national grid.
Eskom’s performance has been the single greatest domestic catalyst. As of December 28, South Africa has experienced over 250 consecutive days without load shedding. This operational stability has allowed the JSE All-Share Index to rally 38.5 percent this year, closing near record highs of 117,000 points. The influx of foreign capital into the equities market has created a consistent demand for ZAR, offsetting the traditional current account deficit. The table below illustrates how the rand has outperformed its peers in the emerging market complex during this high-interest rate environment.
Emerging Market Currency Performance 2025
| Currency | YTD Performance vs USD | Policy Rate (Dec 2025) | Inflation (Nov 2025) |
|---|---|---|---|
| South African Rand (ZAR) | +12.1% | 6.75% | 3.5% |
| Brazilian Real (BRL) | -4.2% | 11.25% | 4.6% |
| Mexican Peso (MXN) | -2.5% | 10.00% | 4.8% |
| Turkish Lira (TRY) | -31.4% | 45.00% | 42.1% |
Technical Breakdown of the 2025 Breakout
From a technical standpoint, the USD/ZAR pair broke its five-year ascending channel in September when it cleared the 17.50 psychological support level. The bearish momentum for the dollar accelerated following the Federal Reserve’s December 10 meeting, where Chairman Jerome Powell highlighted labor market softening. This divergence in labor data—US job growth stalling while South African employment showed a marginal 0.5 percent uptick in Q3—has fundamentally re-weighted the pair.
The removal of the “Grey List” discount has also improved the technical liquidity of the rand. South African banks are no longer facing the same level of enhanced due diligence costs for international transactions, which has narrowed the bid-ask spread in the spot market. This increased efficiency has encouraged a return of institutional “real money” buyers who had been underweight South Africa for nearly a decade. The currency is now trading based on its terms of trade and interest rate differentials rather than purely on the threat of a sovereign default.
Investors must now shift focus to the next specific fiscal gateway. The January 29, 2026 SARB Monetary Policy Committee meeting will be the definitive test of the new 3.0 percent inflation anchor. Watch for the 10-year SAGB yield spread against the US 10-year Treasury; if this spread narrows below 400 basis points, it will signal that the rand’s rally has moved from a recovery phase into a sustained structural revaluation.
