Rand Under Pressure as US-Iran Standoff Fuels Oil Price Surge

Good morning

The US vs Iran war is seven months old today, and while there is much talk about a possible off-ramp to the tensions, it would seem that any potential deal is still some distance away. Oil is up as a result, and the Rand could come under pressure over the coming days.

These are the mid rates at 5:45 today:

USD = R16.35
AUD = R11.49
GBP = R21.66
DXY = 101.12
EUR = R18.63 Brent Crude = $106.17 per barrel

Market News

• South Africans might have enjoyed the day off last Thursday, but the Rand endured a tough time given that the global currency market was still open, and Dollar strength was the order of the day. There were a few reasons for the greenback’s move higher, but they resulted in our exchange rate falling to R16.47 per dollar. While we have clawed back some of those losses since, we go into the new week at R16.35, with fears that a slide back into the R16.40s could be on the cards given the importance of US data releases between now and Friday afternoon.
• There were a lot of moving parts driving currency price action last week, but one of the primary culprits was a US manufacturing and services report that came in at ridiculously strong levels, and which was seen as an indication of building inflationary pressures and, in turn, as confirmation that the Fed would need to keep lifting interest rates. The previous report was already running hot at 56.0 points, but with the latest reading jumping to 58.4, that’s the strongest activity since July 2021, when the US was restarting post-COVID, and suggests that the economy is growing at an annualised rate of 5%.
• A booming US economy is great for its businesses, but a component of the activity report showed that rampant demand is creating some of the most severe supply bottlenecks seen in over two decades, if you ignore the forced COVID shutdowns, and these supply shortages are pushing up prices. This inflationary knock-on effect saw US Treasuries spike, with the 10-year note jumping to 5.22%, which is its highest level since 2007, and one of the main reasons why the Dollar Index followed suit with a move to 101.37 while sending our rate to R16.47 in the process.
• Not helping matters has been an Iranian-tabled route to peace being rejected by Donald Trump over the weekend, and with Brent Crude reacting with a jump from $99/barrel to $106, this only adds to the market’s concerns around inflation. At least one more Fed rate hike this year is being priced in, especially as numerous Fed members have indicated as such over recent days, and, as is always the case, the prospect of higher US rates is a tailwind for the Dollar while making things challenging for the Rand.
• The following is from Reuters and suggests that the Dollar could keep adding to its gains for the rest of the year: The Dollar inched higher to hold near a two-month high on Monday, as the US-Iran standoff continued to push up oil prices while investors looked ahead to a data-packed week for more clues on inflation and central banks’ moves. Energy supply risks and robust fundamentals in the US have heightened inflation concerns and prompted traders to price in a more hawkish FED, while elevated long-end Treasury yields also supported the Dollar. “The greenback could overshoot in the near term if energy market tensions persist and inflation risks continue to build,” said Sim Moh Siong, FX strategist at OCBC. The bank’s base case remains for a moderate USD rally into year-end, he added.
• No local market data today, and the currency market is gearing up for Wednesday’s US inflation report followed by Friday’s US jobs report, both of which have the potential to support the case for further Fed tightening.
• Possible USD mid-rate trading ranges in the Rand today are R16.20 and R16.50.

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