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SA rands

Rand sees only mild weakness as US interest rate expectations rise

The continued intensification of the Middle East War has pushed the rand to R16.20/USD, as the US dollar has strengthened on safe haven inflows

 

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The continued intensification of the Middle East War has pushed the rand to R16.20/USD, as the US dollar has strengthened on safe haven inflows, with the brent crude oil price now at US$107.8/bbl, from below US$90/bbl a month ago. 

The attacks on vessels in the Strait of Hormuz, and Red Sea have negatively impacted financial market sentiment, with the Gulf-Iran Hormuz talks stalling, adding to concerns over fuel supplies, along with recent damage to the Saudi pipeline.

In addition, the escalation of the Russian/Ukraine War has seen Russian oil refiners increasingly destroyed, adding to the strain on global fuel supply, particularly diesel, causing sharp price rises, and negatively affecting business costs.  

President Trump has also warned “(w)e'll ultimately get out (of Iran), unless ⁠we decide to stay and keep the oil like Venezuela” and that revenue from Venezuelan oil has "paid ⁠for the war many times”.

Adding the US will continue the war in the ME until after its mid-term elections, with markets bracing for elevated fuel prices, higher inflation and interest rates. The Fed funds implied futures have brought forward the first US hike to October.

In addition, a 90% chance is now ascribed for a 25bp hike at the September FOMC meeting on Wednesday this week, while October is seen at a 100%. In addition, a second US interest rate hike is now expected for December, a total of 50bp.

The rand has weakened as US interest rate hikes strengthen the US dollar, while the FRA curve has factored in two 25bp hikes for South Africa now as well by the end of the year, providing some, albeit modest support for the rand. 

The switch in market sentiment to expectations of higher interest rates contributed to higher bond yields, while also negatively impacting equities. The rand has only seen moderate weakness against the US dollar mainly as a result of USD strength.

The rand has not seen substantial weakness against the euro and pound either, instead fairly flat versus a month ago, and even against the US dollar, with the majority of its movement coming this month after a strengthening bout.

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About the author

Annabel Bishop
Annabel Bishop, Chief Economist, Investec Bank Limited South Africa

Annabel Bishop joined Investec in 2001 and is the Chief Economist. She has worked in the macroeconomic, econometric, risk, financial markets, political risk, public finance and regulatory, among other, fields for around 25 years. Annabel is the holder of the Sake/Beeld Economist of the Year award for 2010 and has won numerous monthly Reuters Econometer awards, and various Focus Economics (Economic Forecasts from the World’s Leading Economists) categories for correctly forecasting a range of economic variables. She has authored a wide range of in-house and external articles, published both abroad and in South Africa.  She has also guest lectured at Gibbs, the University of Pretoria, Wits, UJ and other academic institutions, and has presented at various national and international conferences. Author of the “Financial Services sector and its support to the economy“ section in the Better Choices Ensuring SA’s Future. 


PREVIOUS RAND UPDATE:

Rand note: rand calm in face of tightening global financial conditions PDF 1.72 MB

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