The sustainability of the ceasefire remains critical.
Image: ChatGPT
The rand has steadied in recent days, holding in a relatively narrow range despite ongoing global volatility, as expectations for aggressive interest rate hikes begin to ease.
The South African rand has hovered around the R16.40 point in recent days, although it did strengthen to a one-month high of R16.30 on April 17.
This relative stability comes even as global markets remain on edge and renewed US–Iran tensions have prompted a rotation out of riskier assets into the dollar on safe-haven demand.
However, underlying pressure on the rand remains.
The currency is still about 3.5% weaker against the US dollar than before the Middle East conflict began, while the trade-weighted rand has declined by 2.6%, according to Investec chief economist Annabel Bishop.
Foreign investors have sold R34.1 billion worth of South African bonds over the same period, reflecting a shift away from riskier assets, said Bishop. This has weakened “the rand to the third worst performing emerging market currency in the Bloomberg ranking to date since before the Middle East war started,” she added.
“The rand is typically sold in risk-off periods,” Bishop said, noting that South Africa’s currency is once again being grouped with higher-risk emerging market peers. She added that it was now ranked at the bottom of twenty-one currencies with the Philippine Peso, Thai Baht, South Korean Won, Hungarian Forint and Mexican Peso.
This has contributed to increased volatility. The rand has experienced the highest implied volatility among emerging market currencies, highlighting ongoing uncertainty, said Bishop.
The pressure is being driven largely by developments in energy markets. Renewed tensions in the Middle East, including disruptions linked to the Strait of Hormuz, have pushed oil prices higher, reviving inflation concerns and weighing on emerging market currencies, according to Trading Economics.
Yet, oil prices have eased slightly to around $95 a barrel “as reports of second-round negotiations unfold,” said Bianca Botes, MD of Citadel Global. “With the end date of the ceasefire approaching, markets are keeping a keen eye on whether the US and Iran will engage in a second round of talks and whether the ceasefire might be extended,” she added.
That is beginning to filter through locally.
Trading Economics noted that South African Reserve Bank governor Lesetja Kganyago said the Iran war’s impact on oil prices has complicated the interest rate outlook amid increasing inflationary pressures.
“Without giving a clear signal on the policy direction, he sounded more hawkish, signalling that the possibility of rate hikes remains open and warning about potential second-round effects from supply-side shocks,” the website said.
Bishop said the lagged effects of higher fuel costs are expected to push inflation towards 4% this year. Last week, Bishop said consumer inflation could rise to around 3.6% this year.
However, Bishop did note that April is seeing a moderation in the under recovery of petroleum products in its second half.
Markets are pricing in just one 25 basis point increase by mid-year, said Bishop. She had previously said markets were pricing in at least one 25 basis point increase this year, and the possibility of a second later in the year
This comes even as she warns that “the risk is clearly also then to the upside for interest rate hikes for South Africa on a longer war”.
Wichard Cilliers, head of market risk at TreasuryONE, said uncertainty remains high as the ceasefire deadline looms and peace talks stall, leaving markets caught between hopes for a resolution and the risk of prolonged disruption.
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