What we know
The past week was largely dictated by shifting expectations around the path of US interest rates rather than the geopolitical headlines we have become accustomed to.
The South African rand continued its recent run of resilience with a strong weekly close at R16.24/USD, after briefly weakening towards R16.50 earlier in the week. The catalyst was a softer-than-expected US labour market report, prompting markets to reduce expectations that the Federal Reserve would need to tighten policy further this year.
This weighed on the US dollar and extended the rand’s broader strengthening trend seen over recent months. Meanwhile, the US Dollar Index (DXY) paused its recent rally, as weaker US employment data reduced demand for the greenback heading into the new week. After reaching its highest levels in several months, the dollar gradually declined to settle just above 100.50 as the week came to a close.
Brent crude oil continued its descent to levels seen before the recent Middle East escalation, closing its fourth consecutive week of decline just below $72 per barrel. Improved shipping conditions through the Strait of Hormuz and easing supply concerns have helped keep energy prices contained despite ongoing geopolitical uncertainty.
Gold rebounded strongly during the second half of the week, supported by a weaker US dollar and renewed investor demand following softer US employment data. The precious metal posted its strongest weekly performance in over a month after finding firm support around the psychological $4,000/oz level.
What others say
Bloomberg – Oil Prices: Only China Knows the Future Price of a Barrel of Crude
“China’s sharp cutback in crude imports helped cap oil prices during the Strait of Hormuz crisis, but with the conflict now over, imports haven’t recovered — raising the question of whether the drop in demand is temporary or permanent.“
Currency News – Why the ANC likes joblessness stats
“What if South Africa’s unemployment rate is lower than advertised? That possibility would undermine one of the ANC’s most powerful political justifications.“
What we think
The rand continues to outperform what many would have expected, despite the numerous global risk events it has been exposed to in recent months.
While geopolitical risks remain elevated, markets appear to be transitioning from reacting primarily to geopolitical headlines to placing greater emphasis on economic fundamentals.
Should incoming US inflation data and Federal Reserve commentary continue pointing towards a less aggressive policy stance, emerging market currencies could remain well supported in the short term.
Even against this uncertain backdrop, the rand has continued to benefit from improving global risk sentiment, lower oil prices and a softer US dollar. Recent price action also suggests investors remain willing to seek yield in emerging markets when US rate expectations ease.
However, this remains a market that can, and often does, change direction quickly. Any renewed escalation in geopolitical tensions or unexpectedly strong US economic data could easily reignite demand for the US dollar and place the local currency on the back foot.
Our range for the week: R16.13 to R16.40.
Have a great week ahead.
