Volatile rand shrugs off easing tensions in the Middle East
Analysts say end to jitters is providing a breathing space for riskier assets
THE RAND REMAINED volatile above the R19-mark against the US dollar in spite of clawing back some lost ground after calm returned to the markets yesterday as the war between Israel and Iran entered the second week.
This comes as the JSE index edged up to around 73 850 index points, tracking its global peers, as easing geopolitical jitters prompted investors to return to riskier assets.
The rand traded at R19.10 to the dollar for most of the day yesterday after spiking to R19.40/$1 when Iran entered the Middle East conflict with retaliatory strikes against Israel.
By 4.49pm the rand was 0.44% weaker at R19.15/$.
Analysts yesterday said that fears around any escalating fallout in the Middle East had eased, providing some room for riskier assets to recover some of their recent losses.
TreasuryONE’s currency strategist, Andre Cilliers, said the markets had regained composure as the Middle East tensions eased following Iran’s measured response to Friday’s Israeli retaliation.
Cilliers said this shift had led to a softer start for the dollar, with gold prices weakening and Brent crude trading below $87. “Investors are eyeing upcoming economic data, including the personal consumption expenditure (PCE) price index and the US’s first quarter GDP report, for hints about the Federal Reserve’s potential rate cuts,” Cilliers said. “The rand, which surged to R19.38 after Israeli airstrikes, settled at R19.10 on Friday and is stable at the start of the week.”
In its Global Financial Stability Report last week, the International Monetary Fund (IMF) warned that the risk of a broader conflict in the Middle East threatened to reverse a surge in the price of riskier assets since the start of the year.
This comes as the strength of the US economy and stickiness of inflation pushed back expectations of interest rate cuts by the US Federal Reserve (Fed).
The IMF also highlighted that the last mile of the Fed’s inflation fight could undermine optimism over rate cuts and painless disinflation, and lead to an abrupt tightening of financial conditions that pressure weaker banks.
Investec chief economist Annabel Bishop said the IMF had also noted that an escalation of the Middle East conflict, “would raise oil prices and inflation, triggering tighter monetary policy from central banks”.
She said this raised some concerns that a rate hike could then prove a risk.
“The rand consequently remains weak in disappointment, with market expectations over the course of this year having pushed out the timing for the first US rate cut from the first quarter to the fourth quarter of 2024, and risks of no cut this year also now present,” Bishop said.
“The rand has historically strengthened during US interest rate cut cycles, along with other emerging markets currencies, and the ongoing delays in the advent of the US rate cut cycle has caused the domestic currency to track somewhat weaker in response.”