The rand is weakening as global uncertainty, rising oil prices and a stronger US dollar drive investors away from emerging market currencies ahead of an interest rate vote in the US.

The rand dropped to around R16.60 to the dollar by midday, after trading closer to R16.40 in recent days. However, it is still off its one-year low of more than R18 to the greenback.

Wichard Cilliers, head of Market Risk at TreasuryONE, said that US President Donald Trump remains unhappy with the latest proposal from Iran to end the war in the Middle East. Iran's latest proposal would set the discussion of its nuclear program aside until the war is ended and the US blockade of Iranian ports in the Strait of Hormuz is lifted.

Cilliers added that the rand was trading softer in line with broader market trends as the dollar firms and emerging market currencies decline. Trading Economics explains that traders are seeking refuge in the greenback amid ongoing Middle East uncertainty and rising oil prices

“The hopes for an early end are fading away, with the war continuing to disrupt energy supplies, raising fears of spikes in inflation,” Cilliers said.

Persistent volatility

According to Bianca Botes, MD of Citadel Global, volatility is expected to persist through a shortened trading week.

As an emerging-market currency, the rand is particularly vulnerable during periods of uncertainty, said Harry Scherzer, CEO of Future Forex. “The rand is especially vulnerable to shocks because investors typically dump riskier assets and rush into safe haven currencies when volatility spikes,” he said.

Scherzer added that South Africa’s reliance on fuel imports amplifies the impact of rising oil prices. “When the war premium pushes Brent crude above $120 per barrel… it tilts the trade balance and fuels domestic inflation,” he said.

Botes noted that the oil derivative had pushed higher again. “This morning, Brent crude is up just under 1%, trading at $109/barrel,” she said, adding that ongoing discussions around the conflict were containing some of the fallout.

Scherzer said that while, higher gold prices would normally support the rand, that effect has been limited. “Higher gold prices, normally a tailwind for the rand, have also been overwhelmed by dollar strength,” he said.

Trading Economics noted that prices of key precious metals such as gold fell, as investors weighed heightened inflation concerns ahead of key central bank decisions. The US Federal Reserve is expected to hold interest rates steady this week.

This article was originally posted by IOL