What we know
By now, anyone who reads this commentary with any regularity will be well aware of the two main drivers of current Rand price action.
On the one hand, we have the geopolitical picture, as the chess game (or perhaps it’s more checkers?) between the USA and Iran rumbles on, oscillating between escalation and de-escalation. While neither side’s next move nor posturing is easy to predict, the causality is fairly clear: escalation → higher oil prices → greater risk aversion → Rand weakness, with signs of calm having the opposite effect.
On the other hand, we have the economic picture and, more specifically, the impact it has on the market’s expectations for Fed rate hikes in the coming months. Similar to the geopolitical situation, market reactions to data releases are fairly predictable: strong US economic data → higher rate hike expectations → increased USD appeal → Rand weakness, and vice versa.
The interplay between these two factors has seen the past month or so characterised by periods of very low ZAR.USD volatility, punctuated by quick, sharp movements in either direction. Politically, we have ranged the full spectrum from optimism around the Memorandum of Understanding to last week’s significant escalation in conflict. Economically, what was interpreted as a hawkish Fed stance significantly boosted rate hike expectations, only to be followed by soft employment and inflation data that largely reversed this outlook.
As is so often the case, while we know what to look out for (and frequently, when), the outcomes remain anyone’s guess. Last Monday, it was the oil price that hinted tensions could be about to ratchet up significantly, as Brent began threatening a move back above $80 per barrel. Indeed, within just a few hours, military activity was intensifying and continued to do so throughout the week, with Brent touching its (for now) highs of $91.40 early this morning and the Rand at its weakest level since 25 June, at R16.57.
Elsewhere, despite the UK being about to welcome its seventh Prime Minister in ten years and England’s footballers confirming that “it’s never coming home”, the GBP has quietly had a strong few weeks, rallying over 2% against the USD and the EUR since late June and currently trading at its strongest levels against the EUR in over a year.
Locally, the SARB’s Monetary Policy Committee will announce its rate decision on Thursday. In May, the vote was split, with four members wanting to hike rates and two wanting to hold them in place. Market commentators appear similarly divided this time, with a slight bias towards another 0.25% increase. Our view favours rates remaining on hold at 7.0%, unless Wednesday’s inflation data delivers a significant upward surprise.
What others say
Daily Maverick – ‘Buck stops here’: Parliament draws line on municipal impunity as municipalities face funding freeze
“Parliament will no longer allow the tolerance of a culture of impunity – municipalities must take immediate responsibility for their lack of compliance.“
Reuters – Forget crude. War pushes refiners to the brink
“Benchmark crude prices have retreated sharply from the highs of $118 a barrel reached during the height of the Iran war and are now hovering around $85, suggesting many investors believe the threat of an energy crisis has faded.“
Visual Capitalist – Who Supplies Every FIFA World Cup 2026 Kit?
“The competition to outfit national teams has become almost as fierce as the action on the pitch.“
What we think
Last week we said that “…(m)arkets appear to be entering a phase where economic data is once again taking centre stage after several months dominated by geopolitical headlines and online tweets.”
Is a ceasefire a break from a war, or is a war a break in a ceasefire? Is the best way to open a strait to close the strait? These questions would be funny if the subject matter were not so serious; however, the point is that we are almost at the end of the fifth month of the US/Iran conflict, and it is hard for anyone to say what the next few days, let alone weeks and months, may bring. And while the opening part of this mailer presented the geopolitical and economic considerations as separate, they are of course inextricably intertwined, as the global economy continues to endure the fall-out from the conflict.
Given that both sides have appeared reluctant to push things too far over the past few months, one would think that a return to diplomacy may not be too far away, even as tensions continue to simmer. Having said that, it seems foolhardy to expect any significant progress in genuinely resolving the differences between the two sides. Therefore, unless we see a meaningful uptick in “kinetic activity” (everyone’s an expert in a world of podcasts), we feel last week’s ZAR.USD trading may have priced things in for now.
Looking at domestic drivers, and with relatively few second-tier global data releases this week, the focus will be on inflation data on Wednesday and the SARB’s rate decision on Thursday. While the volatility of Brent over the past few months may hamper inflation forecasts, we would like to see the SARB hold rates for now and take a wait-and-see approach until September’s meeting.
Our range for the week: R16.30 to R16.60.
Have a great week ahead.
