The path ahead looks challenging for South Africa’s rand, if oil prices are anything to go by.
Concern that US President Donald Trump’s measures will trigger a trade war may hamper global growth and weaken demand for oil, according to Nedbank technical analyst Mehul Daya.
“Oil leads the rand,” said Daya. “60% of the movement in the rand can be explained by changes in the oil price since 1990.”
Talk of tit-for-tat tariffs has already affected the rand. The South African currency led emerging-market losses Wednesday and was down 0.8% to 11.90 per US dollar as of 14:43 in Johannesburg.
The yield on rand-denominated bonds due December 2026 jumped seven basis points to 8.09%. Johannesburg’s equity benchmark tumbled 2.3% as escalating tensions between the U.S. and China dragged emerging markets lower.
“It’s all due to those trade wars and a lot of uncertainty,” said Marius Grobler, a trader at Unum Capital. “Investors are seeing a lot of fear on the market.”
Since 2016, oil has recovered from about $28 to $68 a barrel. This supported rand strength against the dollar from a level of above R16 per US dollar to the current spot price of under R12, according to Nedbank.
“The current oil price implies a fair value for the rand of 11.70 against the US dollar, which is very close to where we are currently trading,” Nedbank analysts Daya and Walter de Wet wrote in a note to clients.
Investor expectation for lower oil prices may weaken the South African currency by as much as 5.9%, they said.
“Notably, using these forecasts implies that the fair value for dollar/rand will likely be in the range of R12.22 and R12.44 over the next two quarters.”