Rand takes a big hit
The rand has become the most volatile Emerging Market (EM) currency in the Bloomberg ranker of implied volatilities, making it one of the riskiest units for investors.
According to Investec Chief Economist, Annabel Bishop, the rand’s volatility was scored at 13.73, down from its March peak of 21.13.
However, it still topped the EM ranking, reflecting the risk-off sentiment, driven by the ongoing Iran War.
Currency volatility is often seen as a negative, reflecting a currency’s susceptibility to specific events and market changes.
The rand is also at the lower end of the credit default swap rankings, Bishop noted, at 146bp. This is also down on its late March reading of 200bp.
This reflects financial markets being less risk-off than at the end of March, but they are still experiencing some volatility, Bishop said.
“The US’s rejection of Iran’s terms saw only modest market reaction, with Iran refusing to give up its nuclear facilities or sovereignty over the Strait of Hormuz,” she noted.
Iran is also demanding reparations from the US for the war and an end to US sanctions.
The Strait remains closed, and consequently, the Brent crude oil price reached $106 a barrel before dropping below $105.
The economist warned that another fuel price increase is building for June, indicative of further inflationary pressure and pressure on interest rates.
While the first half of April saw tensions easing, and so too the pressure on oil prices, the recent flare-ups are pushing in the opposite direction.
“Concerns are now rising about oil and petroleum product supply,” she said. “Markets are now concerned that the Strait of Hormuz will remain closed until the second half of the year.”
Ramaphosa staying on seen as positive
The rand’s volatility is not tied solely to global markets, though. Renewed focus on local politics is also a contributing factor.
Bishop noted that the resurgence of focus on President Cyril Ramaphosa’s Phala Phala foreign currency theft has not roiled markets, but it remains a risk.
The Constitutional Court ruled last Friday (8 May) that Parliament’s 2022 vote to sideline a report implicating Ramaphosa was unconstitutional.
Instead, the matter should have moved on to an impeachment committee. The entire saga has now returned and is casting a significant shadow on the Ramaphosa administration.
It has reignited tensions within the Government of National Unity (GNU), and has also led to calls from Ramaphosa’s political opponents to resign.
Ramaphosa announced on Monday night (11 May) that he will not resign over the matter and will instead seek to challenge the independent panel’s report that implicated him.
Bishop said that having Ramaphosa stay on has relieved financial markets, as the alternatives would have been negative.
“Ipsos polling has shown the Deputy President (Paul Mashatile) is not a popular choice to run the country in the future,” she noted.
Focus is also on the Reserve Bank and South Africa’s interest rate trajectory for the year.
The rand has benefited from the lack of US interest rate hikes fully factored in by financial markets for this year, Bishop said.
Meanwhile, South Africa is seen to have a higher rate trajectory, with rate hikes pencilled in.
This situation tends to support the rand, producing a greater interest rate differential, which would allow for less depreciation on the Middle East war, the economist said.
On Tuesday, the rand was trading weaker against major currencies at 09h30. It was recorded at R16.55/dollar (-0.9%), R22.41/pound (-0.5%) and R19.45/euro (-0.6%).
Loading ...