Rand takes a hit amidst Middle East tensions

The rand hit a month-long high of R19.37 against the US dollar today due to geopolitical tensions following an alleged Israeli drone strike on Iran.

TreasuryONE currency strategist Andre Cilliers said this alleged strike triggered global financial volatility and led to significant movements in key economic indicators.

  • Gold initially spiked to $2,417 before settling at $2,382.
  • Brent crude hit a high of $90.70 per barrel before dropping to $88.80.
  • The rand fluctuated between R19.37 and R19.25 against the US dollar.

Cilliers said the Mexican peso also suffered, losing nearly 5% against the dollar, reflecting a broader unwinding of carry trades amid risk aversion.

However, he said that Iran reported minimal damage to its infrastructure and confirmed no impact on its nuclear sites, which diminished concern over a broader regional conflict. This contributed to the markets’ partial recovery. 

Cilliers explained that, amid these developments, safe-haven currencies like the US dollar and Swiss franc saw appreciable gains. 

This was further bolstered by hawkish comments from Federal Reserve officials in light of robust US economic data, leading to speculation about interest rate hikes rather than cuts.

Global equities, particularly in Asia, faced downturns, with Taiwan’s TAIEX Index dropping over 4% and Japan’s Nikkei falling 3.3%. US S&P 500 futures also saw declines of around 1.3%.

Oil prices surged over 4% in commodities before paring some gains, while metals like gold, copper, and nickel also advanced.

Looking ahead, Cilliers said it is clear that market volatility will persist as geopolitical tensions in the Middle East continue to significantly impact global financial dynamics. 

This is further compounded by the Federal Reserve’s cautious stance on monetary easing, driven by persistent inflation concerns.

Cilliers’ comments were echoed by RMB economists, who said a rebound in the trade-weighted US dollar index was supported by renewed safe-haven flows following the news of potential Israeli retaliation to last weekend’s Iranian drone attack.

This weighed on the rand, which recoiled from 18.92 to 19.21.

They said the volatility spike was also fuelled by more hawkish remarks from Fed officials, further aiding dollar strength to the detriment of high-beta currencies, including the rand. 

“The weakening bias has been further fuelled this morning by news of a bomb strike in Iran, which US officials have penned as being Israel’s much-feared retaliation,” the economists said. 

“In response, USD/ZAR spiked to 19.39 as investor risk aversion drove capital flight to the safety of the greenback.” 

The economist said they expect sustained rand volatility throughout the day as global markets digest news about escalating Middle East military risks.