The South African rand has come under pressure in the new week as markets digest the latest signals from the United States Federal Reserve, and the Iran War continues to bite.
According to Investec Chief Economist Annabel Bishop, markets do not anticipate US interest rate hikes this year, but there is marked pessimism emanating from the Fed.
Notably, higher US interest rates tend to weaken the rand and EM currencies generally, she noted, along with commodity currencies.
While the rand has averaged R16.57/$ to date in the second quarter, after averaging R16.35/$ in the first quarter, Bishop warned that the unit is likely to remain volatile.
More positively, the economist said that incoming Fed Chair Kevin Warsh is seen as more dovish, with market concerns over potential US rate hikes receding.
“The rand could see some further recovery this week, albeit likely more modestly, and is still on course to strengthen towards year-end,” she said.
A worry for the rand is that the US dollar has risen since the war in the Middle East began at the end of February.
The war, which has gone on longer than many had hoped for, led to safe haven flows, which had a direct impact on the rand.
The rand has weakened against the dollar by 4.9% to date, while the US dollar is stronger by 4.3%. Bishop noted that the trade-weighted rand is 4.4% weaker over the period.
On Monday, the rand started the week on the back foot, trading closer to R16.70/$, with uncertainty around the state of the US war in Iran.
Iran war still hitting markets
Iranian media reported attacks on US ships over the weekend, while Washington denied the claims.
The Middle Eastern nation has moved to assert control over the Strait of Hormuz, a choke point for oil shipping, after US President Donald Trump said the US would begin guiding ships not involved in the conflict through the waterway from Monday.
Bishop warned that the conflict will continue to reflect in local markets, including the rand, fuel price recoveries and the Reserve Bank’s interest rate projections.
“Markets continue to hope the ceasefire holds, but there are significant concerns, which are reflected in the oil price at US$111.7/bbl for Brent crude, and three 25bp rate hikes in South Africa’s Forward Rate Agreements,” she said.
The oil price is of particular concern, with the Department of Petroleum and Mineral Resources announcing another massive petrol and diesel price hike hitting this week.
Petrol prices will be rising by R3.27 per litre, while diesel prices will be going up by R6.19 per litre.
Early recovery data from the Central Energy Fund (CEF) shows another negative start for the month, with petrol price recoveries of over R2 per litre, and diesel price recoveries of around 85 cents per litre.
If these recoveries persist for the rest of the month, motorists could face even more pain at the pumps in June.
Fuel tax relief from the National Treasury will also be halved in June, adding R1.50 and R1.96 per litre back to the price for petrol and diesel, respectively.
