In a turn of events that has raised optimism among investors, the South African rand gained strength in early trading on Monday, buoyed by reports suggesting that the African National Congress (ANC), the country's ruling political party, may reconsider its plan to increase the value-added tax (VAT). This sentiment was further amplified by a general weakening of the dollar on international markets.

As of 0845 GMT, the rand was trading at 18.9150 against the U.S. dollar, reflecting a notable increase of approximately 1.2% from Friday's close. This resurgence comes on the heels of an enlightening report from the Sunday Times, which indicated that the ANC might abandon its controversial VAT hike proposal after consultations revealed a lack of support from potential allies.

The ANC's ongoing clashes with its primary coalition partner, the Democratic Alliance (DA), have underscored the fraught political atmosphere surrounding the budget. The proposed VAT increase—set to raise the rate by 0.5 percentage points starting May 1, with another increase of the same magnitude planned for the following year—has not only been met with vocal opposition but has also been challenged in court by the DA, which is known for its pro-business stance. This pushback has heightened investor fears regarding the stability of the Government of National Unity (GNU).

In light of these developments, currency strategist Andre Cilliers from TreasuryONE commented, "If the ANC decides to scrap the VAT increase, it would likely ensure the coalition government remains intact, which is a positive signal for the rand." The two parties held discussions on Saturday to address the deadlock, describing the talks as constructive, although no concrete outcomes were reported.

Last week's volatility in the rand was largely attributed to uncertainty surrounding U.S. President Trump's shifting tariff policies, which have increased tensions with China, South Africa's largest trading partner. This backdrop has contributed to a fluctuating dollar, which dipped approximately 0.4% against a basket of currencies in the latest trading session.

"Markets were unsettled and confused throughout last week, and we're likely to see that trend continue," noted Adam Phillips, a treasury specialist at Umkhulu Treasury, emphasizing the ongoing unpredictability influencing investor sentiment.

In addition to currency movements, South Africa's blue-chip companies capitalized on the positive news, with the Johannesburg Stock Exchange's Top-40 index experiencing a robust rise of about 1.6%. Meanwhile, the country's benchmark 2030 government bond saw a favorable shift, with yields decreasing by 9 basis points to 9.215%.

As the situation unfolds, all eyes will be on the ANC's decision regarding the VAT proposal, a key factor that could shape the economic landscape and the rand's trajectory in the coming weeks.