The South African rand has been highly volatile since the outbreak of the Iran war in early March. Initially, it languished near the bottom of the carry-trade tables. However, since the beginning of April, the rand has made a significant recovery, returning about 5% for traders who borrow dollars to invest in higher-yielding emerging-market assets, making it the most after Hungary's forint among 22 peers tracked by Bloomberg.
Several factors have contributed to the rand's recent rally. Hopes for a ceasefire in Iran have sent oil prices tumbling, which, in turn, has led to a stronger rand and lower inflation expectations in South Africa. The rate at which the South African government borrows has dropped to 8.34% from a peak of 9.27% a month into the conflict, reflecting increased investor confidence. The rand strengthened by about 1% over two days, reaching a level of R16.13/$.
Optimism regarding a potential end to the conflict has spurred foreign bond investment, boosting South African assets. Investec Chief Economist Annabel Bishop noted that the peace deal announcement recalibrated the market, strengthening the rand to around R16.15/$. Bishop anticipates further rand strength as financial market indicators improve and inflation pressures ease. She expects substantial cuts to fuel prices, which had cumulatively risen by R7.96 for petrol and R10.81 for diesel between March and June.
Despite the positive momentum, caution remains. Analysts warn that the recalibrations are happening with "some caution," as it will take time for supply chain pressures to unwind and inflation to show a turn towards disinflation, likely a couple of months. The sustained impact of lower oil prices and the confirmation of the peace deal are crucial for continued rand strength. There is also concern that even if a ceasefire holds, shipping and energy exports might take weeks to recover.
Conversely, earlier in the conflict, renewed instability in the Gulf region caused the rand to hover near a one-week low at around R16.80 to the dollar. Geopolitical tensions tend to drive investors towards safer assets, exposing emerging market currencies like the rand to volatility. The benchmark 2035 government bond also showed strain, with yields rising by 11.5 basis points to 8.895% at one point, reflecting increased investor caution due to the escalating hostilities.
