Rand takes a hit
The South African rand took a hit on Wednesday (8 July), tracking weaker emerging market sentiment after US President Donald Trump said a ceasefire with Iran was “over”.
The rand fell 0.5% to trade at around R16.40 per dollar, its weakest level in a week. Its weaker position was in line with other emerging markets that were hit by the news.
Trump called the ceasefire “a waste of time” after the US launched strikes against Iran in response to attacks on ships transiting the Strait of Hormuz.
Iran’s Revolutionary Guards said they targeted US military sites in Bahrain and Kuwait after Washington launched a wave of military strikes on Iran in response to attacks on tankers in the Strait of Hormuz.
“I think it’s over. I don’t want to deal with them any more, they’re scum,” Trump said on Wednesday at a NATO summit in Turkiye.
While market reaction was not as sharp as at the onset of the war between the United States and Iran at the end of February, it spoke directly to the volatility of the ceasefire agreed to in the past month.
Oil spiked to around $79 a barrel after trading closer to $70 a barrel in recent weeks.
Analysts said that Trump’s comments mark the most serious rupture yet in the agreement, though they acknowledged that it was always shaky.
Like other risk-sensitive currencies, the rand often takes cues from global markets, with analysts expecting its near-term direction to remain closely tied to developments in the Middle East.
“As a net importer of oil, South Africa faces the dual challenge of rising imported inflation and deteriorating global risk sentiment, both of which tend to weigh on the local currency,” said Andre Cilliers, currency strategist at TreasuryONE.
According to Investec Chief Economist Annabel Bishop, shifts in global oil prices will affect fuel prices.
The recent crash in fuel prices will have a positive impact on consumer and producer inflation. However, should this reverse, the opposite would also be true.
Currently, a further R2.00-per-litre cut in the petrol price, and an R2.22-per-litre cut in the diesel price are being built for August. This is based on lower oil prices and a stronger rand.
Any sharp turn risks decreasing this build.
Outside of the war, markets will also be looking to the US Fed’s minutes for signals for interest rate moves.
Bishop said that the rand will retain its “propensity for volatility” and be impacted by global financial markets, particularly US events.
“Key is direction on US interest rates, with hikes in the US negatively affecting the domestic currency,” she said.
This will also be a consideration for the South African Reserve Bank (SARB) and its Monetary Policy Committee (MPC), which will meet later this month to determine the next policy move at home.
After the good news from falling oil prices and a stronger rand—built around the ceasefire—many economists predicted a hold on rates in July.
However, more bearish views pencilled in another rate hike. With relations between the US and Iran souring once again, the bears may have it.
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