The rand started the week on a stronger footing yesterday, strengthening to its highest in nearly a month as tensions in the Middle East put the US dollar on the backfoot.
The local unit firmed 0.8% to R18.79 to the greenback yesterday a risk appetite moderated and the safe-haven dollar weakened slightly as markets nervously watched the temporary ceasefire in the Middle East.
This comes after the currency came under renewed pressure in the first week of October, falling to R19.43/$1 as robust US job market data fuelled speculation of another US interest rate hike.
Israel's government seemed to have agreed to a ceasefire in at least part of the Gaza Strip to allow humanitarian aid in and people with international passports to escape into Egypt yesterday.
Analysts are also cautious of market movements after the South African Reserve Bank’s (SARB) Governor Lesetja Kganyago recently continued with his hawkish tone, saying the bank will continue to exercise its mandate to guide inflation and inflation expectations closer to the midpoint of the target band.
Investec chief economist Annabel Bishop noted that the rand had pulled back to R18.84 against the dollar on Friday and remained below R19.00 yesterday as the US dollar suffered some weakness, while the Brent crude oil price rose above $90 (R1689) per barrel.
“The rand likely gained some comfort from the hawkish SARB comments, but is still far removed from its fair value of closer to R15.00/USD. Higher inflation in coming months is supported by base effects, but petrol price cuts are likely in November,” Bishop said.
“A delay in the SA interest rate cut cycle to the second half of next year is supportive of the rand, as is cutting interest rates by less than the US. Oil prices could climb further in the remainder of this month as the war in the Middle East is expected to persist.”
The rand has, however, remained under pressure for most of the third quarter due to unfavourable global and domestic factors.
Global risk aversion escalated due to concerns about global growth, the struggling Chinese economy, and falling commodity prices while the widening fiscal and current account deficits and persisting power outages also added strain.
Nedbank economist Johannes Khosa said the rand would remain weak and volatile during the final months of this year, bogged down by fragile global risk sentiment due to fears of higher US interest rates, mounting evidence of a global downturn and heightened geopolitical risks.
Khosa said domestic factors would also be unsupportive, with the upcoming Medium-Term Budget Policy Statement likely to confirm investors’ fears of a sharp deterioration in the fiscal position, which would tend to worsen the sovereign risk premium.
“The rand could recover some lost ground next year as global risk appetite should improve once US interest rates have started to ease. Adverse domestic factors will cap the upside,” Khosa said.
“Lingering concerns about government finances, poor domestic growth prospects and the uncertainties surrounding the outcome of next year’s elections will continue to weigh on the rand.”
Meanwhile, Brent crude oil price steadied above $90 per barrel yesterday, consolidating recent gains as traders continued to monitor the Israel-Hamas war and its impact on global oil supply.
The international oil benchmark jumped nearly 6% on Friday amid fears of a wider conflict in the Middle East as Israel goes on the offensive in Gaza.
Old Mutual Wealth investment strategist Izak Odendaal said that Brent crude oil price was at an uncomfortably high level, but so far, the moves were small in the context of the volatility of the past four years and even the past few months.
Odendaal said the big risk was a major disruption to oil supplies, either from damage to infrastructure or if Middle Eastern oil producers deliberately cut back production to pressurise Israel and its allies.
“The tragic explosion of violence is likely to be a defining moment in the history of Israel and Gaza, but seems unlikely to have a major impact on the global economy,” Odendaal said.
“For markets, the ongoing strength of the US economy, and the implications for interest rates and inflation loom larger.
“Nonetheless, there is no doubt that, geopolitically, we are in a very uncertain world. The post-Berlin Wall, pre-Covid environment of relative peace and prosperity, accelerating globalisation, and low and stable inflation and interest rates seem to be over.”