Rand holds steady in line with emerging markets as focus remains on Middle East tensions

Rand holds steady in line with emerging markets as focus remains on Middle East tensions

JOHANNESBURG – The rand stood its ground against the US dollar in early trade on Tuesday after domestic markets closed in the red on Monday, over rising concerns in the Middle East and pulled down by losses in banking and platinum mining sector stocks.

After opening at 14.2106 to the dollar from a previous close of R14.2117 the domestic currency went on to trade within a range of R14.1381 to R14.3029, before softening to a 3:30pm bid of 14.267 a dollar.

Investec economist Kamilla Kaplan said the local manufacturing sector would be in focus this week with the release of the manufacturing production update for November and the manufacturing purchasing managers’ index (PMI) survey for December. 

Kaplan said manufacturing production was forecast to have decreased by 1.3 percent year on year in November compared with a 0.8 percent year-on-year decline in October. “The PMI gauge is forecast to have moderated to 46.0 in December from 47.7 previously, amid another bout of electricity load-shedding in December. Manufacturing sector activity is likely to be curtailed by tepid global trade momentum. 

“On the domestic front, the electricity infrastructure remains weak in view of the high level of unplanned breakdowns during December and consequently deferred planned maintenance. Should load-shedding be reinstated in the new year, depending on its extent and severity, manufacturing production would be negatively affected,” said Kaplan.

While the total vehicle sales data for December could impact the rand, external factors in the form of US-China trade and developments around the US and Iran would influence South Africa’s currency, according to FXTM analysts. With regard to the technical picture, the USD/ZAR looks set to test R14.10 in the near term if the rand continues to appreciate.

Neil Wilson, chief market analyst at said markets could be absurdly quick to discount risk and recover from geopolitical spasms, particularly those in the Middle East. US stocks recovered to finish higher on Monday, bouncing back from their worst day in a month on Friday and despite weakness in Europe. 

“Yesterday I’d questioned how long the risk-off moves would last as, particularly as it entails fighting the Fed, but the move back into positive territory was even swifter than could be expected.

“The lack of any direct response so far from Iran has becalmed markets. I would stick to the view that that the regime is afraid of major open conflict and will seek to avoid it whilst still ‘responding’ in some way. The US seems more ready for the fight but cannot be seen to be the aggressor,” said Wilson.

Bianca Botes, treasury partner at Peregrine Treasury Solutions, said the mood in the currency market remained cautious as Middle East tensions weighed on risk appetite.

“Positive data from the EU on Monday saw the euro gain some ground against the dollar, with the rand tracking the euro stronger. The domestic unit has also been lent support by a gold price which reached its highest levels since 2013,” said Botes.

Andre Botha, senior dealer at TreasuryONE, attributed the recovery in the markets to the absence of any immediate escalation of tensions between the US and Iran. 

“Both the euro and pound are holding on to Monday’s gains against the dollar and the rand was firmer this morning in line with other emerging market currencies as markets wait to see how the geopolitical situation in the Middle East pans out,” said Botha. 

Oil and Gold have slipped from their highs while stock markets and riskier currencies have firmed overnight. 

Oil prices fell more than 1 percent on Tuesday as investors reconsidered the likelihood of Middle East supply disruptions amid the US-Iran faceoff.

WTI Crude and Brent have both gained over 3 percent year-to-date as the US-Iran tensions sparked fears over negative supply shocks in the markets. Given how the Middle East is home to major oil-producing countries, the threat of supply disruptions has offered a boost to oil in the near term, according to FXTM analysts.

However, geopolitical tensions may not be enough to keep oil prices elevated in the medium to longer term. Continued oil upside faces multiple obstacles in the form of rising US Shale production and weak oil demand growth in the face of renewed US-China trade tensions. 

Gold pared some of its gains after hitting a six-year high on Monday, although it’s finding support at the $1 560 psychological level for the time being.

The analysts, however, noted that tensions in the Middle East were likely to stimulate risk aversion, consequently boosting investor’s appetite for Gold.