The rand fell to a touch of R19 to the greenback after the escalation of the conflict in the Middle East, and other domestic factors continued to put pressure on financial markets.
Additionally, the domestic currency was also depressed by the continued strength in the dollar on the back of higher-than-expected inflation, as well as economic uncertainty ahead of the pivotal general elections in South Africa next month.
The rand weakened to R18.99/$1 during early trade yesterday, remaining at its lowest level in two weeks, from Friday’s close of R18.84/$1 as higher US inflation dashed hopes for an earlier rate cut, while geopolitical conflicts weighed on market sentiment.
Over the weekend, Iran launched a barrage of missiles and drones on Israel, two weeks after a suspected Israeli strike on its consulate that killed an Iranian military commander Major-General Mohammad Reza Zahed in Damascus, Syria.
Citadel Global director Bianca Botes said the markets were now on tenterhooks about the implications of escalation of war in the Gulf region.
“Market sentiment starts the week on the back foot following the retaliatory attack by Iran on Israel over the weekend. Fears are increasing that there will be a rapid escalation in conflict in the region,” Botes said.
Armed groups backed by Iran such as Hezbollah and the Houthis have been trading attacks with the Israeli military along the Red Sea since October 8, the day after the Hamas-led attack in southern Israel and Israel’s brutal retaliation on the besieged Gaza Strip.
Rand Swiss portfolio manager Viv Govender said Iran was pretty careful not to attack civilian areas, and so it was more of a show attack than actually trying to do serious damage as they had telegraphed the attack well in advance.
However, Govender warned of the serious fallout to global oil prices and consumer inflation should the conflict between Iran and Israel escalate to a full-on war.
“The Iranians have the ability to close up what’s called the Straits of Hormuz, a piece of water at the start of their border. And that would basically cut off much of the world’s or a significant chunk of the world’s natural gas and oil supplies. This would be effective in places like China and India but other parts of the world, Asia especially, would also be affected,” Govender said.
“They also have the ability to cut off ship travel through the Red Sea because they have the Houthis in that region. That would affect trans-supply chains between Europe and Asia as well. And so it would be very inflationary. We’ll probably see oil prices spike up more than they would have spiked up after the Russia-Ukraine invasion,” Govender added.
The South African government has said that it was “gravely concerned” at developments in the Middle East and the possible escalation of hostilities.
In a statement on Sunday, the Department of International Relations and Co-operation (Dirco) said the UN secretary-general Antonio Guterres has also warned that there was a very real danger of a devastating region-wide escalation.
Meanwhile, Investec chief economist Annabel Bishop said the rand was also undercut by the uncertainties hanging over the economy with the election six weeks away, and no clarity on the nature of the likely coalition government.
Opinion polls suggest the ANC could get less than 50% support, while opposition parties are fragmented, leading to a chaotic coalition government with no certain economic policy.
“Numerous pre-election sentiment polls showing support for the ANC weakening have also negatively affected the domestic currency, with the risk in some recent polls showing a below 40% outcome for the leading political party,” Bishop said.
“Worries over the nationalisation policies of the EFF, which the ANC had already gone into coalition with in some metros has negatively affected investor sentiment, as nationalisation of property is negative for investment and growth,” she said.
BUSINESS REPORT