Nice surprise for the rand
The rand is largely ignoring a swathe of global geopolitical tensions that are causing markets no end of uncertainty, settling stronger against the dollar as interest rate expectations start to fade.
The rand has started the new week in a stronger position against the US dollar, trading at around R16.15.
According to Investec Chief Economist Annabel Bishop, the rand is in a much stronger position than the R16.44/$ average this quarter, and is likely to strengthen further.
She noted that the strength is coming from a degree of risk aversion easing in global markets as rate hikes, which were once seen as all but certain, are now becoming a lower probability.
The South African Reserve Bank (SARB) shocked markets at the end of July by voting to hold local interest rates. Most economists and analysts anticipated a 25 basis point hike.
This was followed by a hold on interest rates in the United States, and a shocking reversal of job numbers from the world’s biggest economy, which experts said would make further hikes difficult to justify.
“While interest rate hikes in South Africa tend to strengthen the rand with immediate effect and weaken the rand if they do not occur as expected—as happened to financial markets in July in South Africa—US rate hikes weaken the rand,” Bishop said.
She noted that a 25bp hike still remains fully factored in for December in South Africa’s repo rate, but the expected hike in the United States “continues to be very gradually factored out”.
Over the past week, the rand has shown typical volatility, swinging between R16.09 and R16.25 against the dollar, but it has largely shrugged off the major geopolitical events.
Specifically, the ongoing war between Iran and the United States.
The conflict between the two nations flared up in mid-July as peace talks collapsed and the Strait of Hormuz was once again closed.
The oil price surged to $100 a barrel for the second time this year, leading to sharp under-recoveries in local fuel pricing at the start of August.
However, Bishop noted that oil prices have now dropped below $90, with the under-recoveries diminishing—now at 58c/litre for petrol from over R1.00/litre.
This is aiding sentiment that the under-recoveries could even drop to zero. This would be good news for motorists, but “markets are still worried about inflation,” Bishop said.
Rand shrugging off the war talk
Reflecting on the Middle East conflict, Bishop said that a peace deal in the near term is seen as unlikely.
Iran has demanded that the US meet a list of conditions, while the Trump Administration has demanded compensation from Iran before continuing peace talks.
“The conditions are seen as being at odds with the memorandum of understanding and as a new risky strategy,” Bishop said.
Nevertheless, “the rand has largely ignored the geopolitical developments…and the US dollar has seen only modest volatility, causing little impact on the rand,” she said.
“The volatility is likely to persist until a permanent ceasefire is reached in the Middle East,” she said.
“The oil shock and Middle East War are expected to reflect badly on the US president and the Republican party in the US mid-terms on 3 November this year.”
Because of high levels of dissatisfaction with the Trump Administration and polling showing a lead for the Democratic Party in the US, the outcome of the US elections will have an impact on markets.
This includes for South Africa and the rand.
“From next year, there may be a curb on US foreign policy, and a reduction in the volatility that has impacted global financial markets—and so emerging market currencies such as the rand,” Bishop said.
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