The rand has slumped to its worst level since April 2020, reaching R18.81/$ earlier on Wednesday. Less than a year ago, it was trading below R15.30.

Global markets are jittery ahead of US inflation data, which will give some indication of where rates in the world's largest economy are headed.

Investors are used to South Africa offering much higher interest rates than developed markets like the US, which has made rand investments attractive.

But following aggressive US rate hikes, that differential has now shrunk.

"The US has hiked by a huge 500 basis points to date in its current cycle, and South Africa by only 425bp, causing the differential between SA and US interest rates to drop substantially during a risk-averse period, which has weakened the rand," said Investec chief economist Annabel Bishop in a note.

The US Fed has likely reached the end of its rate hikes, but the European Central Bank recently said it is "extremely clear" that it won't pause soon.

The rand was trading at R20.54 to the euro and R23.65 to the pound at lunchtime on Wednesday. 

The market has already priced in a 25 basis point hike in South African interest rates in May, but Bishop says 50 basis points are possible.

"(Still), SA’s 'real return' [return after inflation] on interest rates is low and not attractive to investors comparatively, adding to rand weakness," said Bishop.

Adding more pressure on the rand is foreigners selling local bonds - a net R11.4-billion has so far flowed out of the country due to these sales.

The rand, along with other emerging markets, has also been hit by risk aversion, amid uncertainty about a US recession, cooler growth in China and the ongoing Ukraine war.

"In a risk-off environment [where investors tend to avoid risky assets], South Africa should offer a higher risk premium return on the rand, not a lower one, in order to keep the rand stable, but the erosion of the differential between SA and US rates has lowered the risk premium instead," added Bishop.

The rand weakness will add to hot inflation in South Africa, as the country imports most of its fuel, and key crops like maize and wheat are priced according to import and export parity (in dollar).

In addition, government's fiscal position is taking strain, which will weigh on the rand. For the past financial year, Treasury was expecting a primary budget surplus of R6.7-billion – instead it suffered a deficit of R1.53-billion, it was confirmed last week.

Over the past two years, government tax income has been bolstered by mining companies which earned super-profits during a commodity price rally.

However, this is falling away, warns Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management.

He says Sibanye's recent "shocking" production report shows that government may be set for large budget deficits, if the mining sector is an indication.

"We are in trouble."