What we know
Last week the USD/Rand pair was driven mainly by two forces: the ongoing war in the Middle East and the Fed’s interest rate decision. The continuation of the conflict meant that investors remained cautious, providing dollar support as a safe-haven asset. The Fed’s decision to keep rates unchanged was not a surprise and was widely priced in, although the dollar lost some ground in the hours following the announcement.
Due to a shift in the inflationary trend and data showing significant cooling, the likelihood of two rate hikes from the Fed for the remainder of the year has decreased dramatically, with the market now leaning towards pricing in only one increase.
The Rand has continued to broadly follow the oil price in the absence of any high-impact local economic data. As Trump paused strikes last week, markets were able to take a breather. Both the oil price and the Rand had room to improve throughout the week, despite continued threats from the US of imminent attacks, before strikes resumed towards the end of the week.
Although the dollar continues to benefit from geopolitical tensions, the market appears to have lost interest in other safe-haven assets such as gold, which has been hovering at just under $4,050 per ounce and reacting far less aggressively to new developments between the US and Iran.
What others say
Moneyweb – South Africa factory sentiment hits seven-month low on war fears
“A gauge measuring South African manufacturer sentiment slumped to the lowest level in seven months over concerns that escalating hostilities in the Middle East could impact demand.“
Politico – Trump has been able to keep oil prices low. But that power may not last forever.
“Trump’s ability to talk down oil and gas prices may be fading just as Republicans enter the midterm stretch.“
Business Insider – Inside the ‘yen-tervention’: Why the US stepped in to boost Japan’s currency
“The lowest yen in 40 years versus the US dollar doesn’t just happen overnight. The biggest culprit has been the widening gap between the Federal Reserve and the Bank of Japan.“
What we think
Last week we said, “Any evidence that US inflation continues to moderate, or a de-escalation of the US/Iran conflict, would likely improve global risk sentiment and provide emerging market currencies with some much-needed support.”
Although the conflict has not come to a halt, the temporary de-escalation did allow the Rand to regain ground last week. Having lost count of the number of ceasefires, we are yet to see anything worth celebrating, as Trump continues to threaten Iran, but any reprieve is welcome from a local perspective.
In the coming week, the market will likely remain quiet in the absence of conflict escalation, while awaiting US employment data on Friday. The previous figure came in significantly short of the forecast, leading to a sudden weakening of the dollar. With this month’s forecast being lower, another miss would leave the door open for further Rand strength.
Our range for the week: R16.30 to R16.65.
Have a great week ahead.
