The domestic currency is still stronger than a year ago.
Image: Traders Union
Easing tensions in the Middle East buoyed the rand on Monday, with the local currency strengthening to its firmest level in weeks as hopes of a US-Iran breakthrough sent oil prices tumbling – raising hopes that there may be a fuel price cut.
The rand traded near R16.30 on Monday morning, recovering sharply from about R16.78 a week earlier, Investec data shows, as markets reacted positively to signs that negotiations around reopening the Strait of Hormuz were gaining traction.
According to Trading Economics, the rand strengthened to its highest level since mid-April as investors increasingly positioned for a de-escalation in tensions between the US and Iran.
Markets were further encouraged after US President Donald Trump said a memorandum of understanding had largely been negotiated, although he cautioned he would not “rush” a deal, Trading Economics noted.
The improvement in sentiment also pulled Brent crude oil below the psychologically important $100-a-barrel level for the first time in weeks, easing fears of a prolonged oil supply shock and improving the outlook for South African fuel prices.
Annabel Bishop, Investec chief economist, noted that Brent crude oil had fallen to about $97.9 a barrel from around $112 a barrel a week earlier, materially reducing pressure on local fuel prices. “A week ago, the petrol price had not switched to a cut for June instead of a building hike,” she said.
“Brent crude dropped below $100/barrel for the first time in weeks as traders unwind some of the geopolitical risk premium that has dominated markets since the conflict began,” Andre Cilliers, currency strategist at TreasuryONE said.
Cilliers added that traders were rapidly unwinding some of the geopolitical risk premium that had dominated oil markets since the conflict escalated.
That reversal has fuelled expectations that South African motorists could now see a petrol price cut in June instead of an increase, said Bishop. “A petrol price cut is now building for June,” Bishop said.
However, Treasury's scaling back of the fuel tax relief that was announced in April will counteract this, with R1.50 being added back to the fuel price equation from June and R3.00 from July.
ALSO READ: SA's fuel price forecast for June
Bishop said the earlier spike in global risk aversion triggered by oil supply fears had started to unwind, helping support emerging-market currencies, including the rand.
“The domestic currency is still stronger than a year ago, up 12.9% year on year to date on average and still benefiting from the improved investor climate for South Africa from the middle of 2024 to this year,” she said.
Bishop added that the rand was also averaging 7.4% stronger against the pound and 4.1% firmer against the euro compared with a year earlier.
Cilliers, said the rand was also benefiting from improving domestic investor sentiment after Moody's Ratings upgraded South Africa’s outlook to positive from stable.
“The move reflects improving fiscal performance, stronger revenue collection and continued structural reform progress,” Cilliers said.
Cilliers added that "markets are likely to interpret the decision as a strong vote of confidence in South Africa’s fiscal trajectory, with bonds and the rand expected to benefit from improved investor sentiment and potentially lower long-term borrowing costs."
Bianca Botes from Citadel Global said hopes of a US-Iran peace deal were boosting broader market sentiment globally. “Optimism around a possible United States-Iran peace deal has boosted market sentiment and is supporting risk appetite,” she said.
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