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The rand has returned to R16.25/USD, running at R16.44/USD this quarter, likely to see further strength, but with marked volatility, reaching R16.09/USD in the second half of last week, as global financial market risk aversion eased.
The Brent crude oil price has dropped below US90/bbl, while the petrol price hike signalled for September has dropped to 58c/litre from over R1.00/litre, aiding sentiment and could drop to zero, although markets are still worried about inflation.
A 25bp hike remains fully factored in for December in SA’s repo rate, while the 25bp hike expected on balance still in the US by December also continues to be very gradually factored out – i.e. only a 20bp lift in rates is seen by markets by December.
While interest rate hikes in SA tend to strengthen the rand with immediate effect and weaken the rand if they do not occur as expected, as happened to financial markets in July in South Africa, US rate hikes weaken the rand.
US data shows some modest softening versus surveyed expectations, and versus prior readings in certain data, not enough to cause concern over US growth but adding to the moderation in the US rate hike forecast for December.
The US has had a volatile, disruptive effect on financial markets as a result of its foreign policy since last year, and yesterday President Trump added that he now requires compensation from Iran before continuing peace talks.
Iran has said the US must meet a list of conditions in order to restart talks with the US, including lifting sanctions and unconditionally releasing frozen Iranian assets, pay damages to Iran from the war before or during the Straits opening.
.In addition, Iran requires the lifting of the US naval blockade in the Strait of Hormuz and the US withdrawing its military forces in and around Iran. The conditions are seen at odds with the memorandum of understanding and as a new risky strategy.
A peace deal in the near term is now seen as unlikely, but the rand has largely ignored the geopolitical developments in the Middle East, and the US dollar has seen only modest volatility, causing little impact on the rand.
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About the author
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.
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