Good news for the rand
The South African rand has gained against the dollar over the past week as companies have become accustomed to the war in the Middle East and global market expectations for interest rate hikes this year have faded.
The rand was trading around R16.20 to the US dollar on Monday (17 August), little changed from its close last week.
The local unit has shown remarkable resilience this year, suffering alongside other emerging market currencies at the onset of the US-Iran war, but supported by solid local economic fundamentals.
According to Investec Chief Economist, Annabel Bishop, while the rand takes much of its direction from global markets, things have started to stabilise in the bigger picture.
“Market risk improved as the global economic outlook brightened, and market players have become more accustomed to the volatility in the Middle East, which sees renewed flare-ups,” she said.
Global markets were thrown into chaos earlier in the year as the US war in Iran caused a surge in oil prices to over $120 a barrel.
Prices fell as the countries entered into peace talks in June, but a reignition of the war in mid-July, as talks collapsed, pushed prices back to $100 a barrel.
On Monday, oil was trading under $90 a barrel, with markets forecasting a sticky range of $80-$90 a barrel.
While prices are currently about $25 per barrel higher than before the war, international petroleum product prices have essentially stabilised since the March shock.
“Businesses [are] more acclimatised to the disruptions of the Middle East war, and seeing operations improve,” Bishop said.
In addition to the relative stabilisation, markets are also slowly pricing out interest rate hikes in the United States this year, which is boosting emerging market currencies, including the rand.
Interest rates helping
Bishop said the US Fed funds implied futures show only 89% of one 25bp hike in US interest rates by the end of this year.
Instead, the expected 25bp hike in the Fed funds rate is now only fully priced in by January 2027.
By comparison, South Africa’s Forward Rate Agreement curve is currently pricing in a second 25bp hike in the repo rate by March 2027, but no more after that.
Local interest rates are expected to see easing pressure in the second half of 2027, she added.
“The US does not see further rate hikes over 2027 after the January 2027 25bp uptick, and also sees easing pressure in H2.27,” she said.
Bishop noted that a higher South African interest rate tends to strengthen the rand, as do lower or no US interest rate hikes—or fewer US hikes than in South Africa.
“The moderation in financial markets’ US interest rate hike expectations has seen emerging market currencies in general strengthen against the US dollar,” she said.
“The softening of the US dollar on fading US interest rate hike bets is very supportive of the rand.”
With the current quarter over the halfway mark, the rand is averaging at R16.41 to the dollar, R18.80 to the euro, and R22.00 to the pound.
This is expected to shift by the end of the quarter, with the rand projected to average at R16.30 to the dollar, R18.98 to the Euro, and R22.05 to the pound.
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