Another hurdle for the rand

 ·10 Oct 2023

The war between Israel and Hamas could be another conflict in which South Africa is deemed to be on the wrong side.

In a rand note, Investec Chief Economist Annabel Bishop said that the stronger-than-expected US payroll data saw the rand weaken to R19.64/$ yesterday before returning to R19.29/$, as it increased the chances of higher US interest rates for longer.

In addition, a stronger US labour market – with over 330,000 jobs added in September – increased concerns about the pace of the slowdown in inflation, with more robust expenditure also likely to keep US interest rates higher for longer – increasing risk off.

“Also adding to risk aversion for global financial markets is the uncertainty of the outbreak of war in the Middle East between Israel and Palestine, which is seen to risk some upward pressure on oil prices and so potentially inflation,” Bishop added.

“Worries also stem from the conflict broadening to include other countries in the Middle East, as well as the conflict deepening. Israeli Prime Minister, Benjamin Netanyahu, has already warned that it will be a long and difficult war.”

The United Nations Secretary-General condemned the attacks by Hamas against Israeli towns near the Gaza Strip and central Israel, whilst the US has called for an end to the conflict, as peaceful negotiation into a two-state system is the only way forward.

The conflict caused oil prices to increase from $84/bbl to over $87/bbl, as other Middle Eastern countries may join the conflict.

“In 1973, OPEC (the Organization of Petroleum Exporting Countries) imposed an oil embargo against the US during the Arab-Israeli War, although the bulk of US imports now come from Canada, with Mexico in a distant second place,” Bishop said.

However, the rand is also at risk due to the conflict if the government doesn’t play its cards correctly.

“While South Africa is geographically far removed from the Israel/Gaza conflict, South Africa is not deemed to have shown complete neutrality towards the Russian/Ukraine war, and concerns exist that this may be repeated, which would undermine the rand further,” Bishop said.

The Department of International Relations and Cooperation (DIRCO) has also called for a ceasefire, but it is clear that they do not blame Palestine for the escalation.

“The new conflagration has arisen from the continued illegal occupation of Palestine land, continued settlement expansion, desecration of the Al-Aqsa Mosque and Christian holy sites, and ongoing oppression of the Palestinian people,” the department said.

Although the ANC government has consistently backed Palestine over the last several decades, the US is a staunch supporter of Israel, with the New York Times reporting that weapons and warships are being sent from the world’s largest economy to Israel.

Interest rate pain

In more bad news, Investec’s base case scenario now expects interest rates to stay higher for longer.

The group originally expected rates to be cut in Q1 2024, but its new base case scenario only expects a cut in Q3 2024.

This is in line with RMB chief economist Issah Mhlanga who expects interest rates to only drop in the second half of the next year.

That said, Investec and RMB do still expect interest rates to stay where they are, with no hikes predicted.

However, economists at the Bureau for Economic Research (BER) said that they expect interest rates to increase when the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) meets in November.

The BER said that the weakening of the rand last week – a 3% drop against the dollar – worsened the inflation outlook.

“With this in mind, there is a rising probability that the SA Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will increase the repo rate by another 25bps (to 8.50%, prime rate to 12%) at its next meeting on 23 November,” the BER said.

“This view is also informed by the fact that there were already two (out of five) votes for a 25 basis points increase at the July and September MPC meetings.

In addition, last week’s drop in oil prices could be short-lived due to the war between Israel and Hamas, which could also hurt the inflation outlook.

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