The rand hovered around two-week highs on Friday mainly supported by expectations of interest rates staying high for an extended period while the rally in the gold prices had a positive impact on the rand since South Africa is a gold exporting country.
After retreating to five-months high last week, the rand traded around R18.90 to the US dollar early on Friday, holding close to an over two-week high before closing Friday 0.2% higher at R19.03/$1.
The minutes of the Federal Reserve's September monetary policy meeting showed that the central bank is committed to maintaining a “higher for longer” monetary policy stance until it is confident that inflation is falling back to the 2% target.
The Consumer Price Index in the US increased for a second month in a row to 3.7% year-on-year in September, reinforcing the Fed’s intent to keep interest rates high and bring down inflation.
Domestically, the SA Reserve Bank Governor Lesetja Kganyago has repeatedly emphasised that the central bank's battle against inflation was not yet over, and warned at the Monetary Policy Committee’s last meeting that deteriorating public finances would lead to higher rates.
He also identified potential risks to the inflation outlook, including higher oil prices, global financial conditions and the strong dollar, and food prices reversing their downward trend
TreasuryONE currency strategist Andre Cilliers said the rand had strengthened from R19.60 to R18.80 in nearly a week, and the US consumer inflation was merely a catalyst for a bit of a correction.
“Overnight US Stock Markets closed softer as interest rate expectations for the remainder of the year weighed down equities,” Cilliers said.
“We can expect the market to look at the Michigan Consumer Sentiment, and with the rand driven mainly by moves in the dollar in the short term, it is likely to have an impact on where we close the week.”
There has also been a sentiment that the Middle East conflict had more of a positive effect on South African markets as the flight to gold had appreciated the rand.
The price of the precious metal gained more than 4% since hitting a multi-month low earlier in October, with the gains resulting from declining bond yields as investors increased bets on the end of the Fed’s hiking cycle.
The price of gold increased by more than $110 (R2090) over the last seven days, and ended Friday on $1 930 per ounce due to tensions in the Middle East boosting demand for the yellow metal.
Analysts said growing tensions in the Middle East were also driving greater demand for bullion as investors began to price in the disruptive impact that an escalation in the conflict between Israel and Hamas may have in the financial markets.
Sequoia Capital Management consulting economist Chris Harmse said the gold rally was expected to continue boosting the rand exchange rate as there was no end in sight in the conflict in the Middle East.
“Given that the gold price had surged by $53 per ounce last Friday, the metals and mining index improved by 4.90% on the day. It is now expected that this tendency will continue,” Harmse said.
“The big spike in the gold price caused the rand also to appreciate strongly by more than 50 cents against the US dollar over the last week. The currency traded at the close of the JSE on Friday at R18.99/$.”
Middle East tensions also continued to impact oil prices as well, and Brent was quoted at $86.60 during the early hours of Friday morning before spiking dramatically.
Brent crude futures topped $90 per barrel on Friday, up nearly 6% on the week as the conflict in southern Israel and Gaza unfolds, raising geopolitical risks in the Middle East.
The US also imposed the first sanctions on owners of tankers carrying Russian oil priced above the G7’s price cap of $60 per barrel to enforce measures meant to punish Russia for the invasion of Ukraine.
Investec chief economist Annabel Bishop said oil prices had already reached $94.43 per barrel on tightening supply over September, with the US having drawn down its Strategic Petroleum Reserve (SPR) to limit oil price gains, but this has created worries now of shortages as the reserve is depleted.
“The depletion of the US’s SPR reserves is adding to the lift in oil prices, with neither Israel nor Palestine key oil exporters, but risks for higher oil prices (with Brent reaching or exceeding US$100/bbl) this year exist on the conflict widening to other regions, as the war intensifies currently,” Bishop said.
“Higher oil prices add directly to inflation, with markets having hoped that the upwards interest rate hike cycle had ended globally, even if rates are likely to stay higher for longer. The war could imperil the terminal rate having already been reached.”