The South African rand began the week on the backfoot as it traded at R16.40 against the US dollar on Monday.
Rising Brent crude prices played a part, along with prospects of the US Federal Reserve's possible further rate hikes, which strengthened the US currency.
Brent traded roughly closer to the $108 per barrel mark for most of Monday, after a slight decline to $106.05 per barrel in the afternoon.
Andreas Tindlund, fixed income fund manager at Abax Investments said that the rand faced a double blow on Monday.
Tindlund said: "Brent crude was up about 3.5% from Friday at roughly $108 a barrel, while gold was down more than 3% at around $4,150 an ounce. South Africa imports oil but exports gold and other precious metals, so this combination weakens our terms of trade. The country is paying more for an important import while earning less from a major export. This is negative for the trade balance and has contributed to the rand weakening against the US dollar."
Tindlund said that the rand had effectively become a high-beta expression of developments in the Iran conflict.
Escalation has generally pushed oil higher and precious metals lower, weakening the rand, while signs of easing tensions have tended to produce the opposite response. The latest pressure followed another setback in negotiations concerning the reopening of the Strait of Hormuz, renewing concerns about global energy supplies, he said.
He said the global bond-market sell-off has also been relentless. "The US 10-year Treasury yield has moved above 5.20%, its highest level since 2007, as investors respond to stronger economic data, increased inflation risks, expectations of further interest-rate increases and the large volume of government debt being issued," Tindlund said.
He added that South African bond yields have also risen in response, although the local bond market has still outperformed major developed markets since the beginning of the year.
"Since the start of the year, 10-year government bond yields have risen by about 105 basis points in the US, 98 basis points in Japan and 91 basis points in the UK, compared with approximately 73 basis points in South Africa."
Since bond prices fall when yields rise, this means South African bonds have performed better than their developed-market counterparts.
"South Africa’s relative resilience reflects improved fiscal discipline and a more credible inflation framework, while several developed economies continue to run large fiscal deficits and borrow heavily in bond markets," Tindlund said.
He cautioned that it would be dangerous to assume that South Africa is insulated.
"It is historically unusual for an emerging market to outperform to this extent during a global bond sell-off. If global yields and oil prices remain elevated, local yields are also likely to move higher, even if South African bonds continue to outperform on a relative basis," he said.
For ordinary South Africans, these market moves ultimately show up in household budgets.
"The South African Reserve Bank (Sarb) raised the repo rate by 25-basis-points last week to 7.25%, taking the prime lending rate to 10.75%, in response to growing inflation risks. This raises repayments on variable-rate home loans, vehicle finance and other prime-linked debt. We believe additional rate increases may be required if oil remains elevated, the rand weakens further or higher fuel costs begin feeding into broader prices," Tindlund said.
At the same time, current projections point to increases of approximately R3.01 a litre for 95 ULP petrol and R3.08 a litre for 50ppm diesel on Wednesday, 7 October, although the final adjustments have not yet been announced.
"This will affect much more than the cost of filling a car. More expensive diesel raises the cost of farming, freight, public transport and moving food from farms to shops. These higher transport and production costs can ultimately feed into the prices of everyday goods. Consumers are being squeezed from both sides," he said.
Nolan Wapenaar, co-chief investment officer at Anchor said that the US financial markets are increasingly expecting further interest rate hikes from the Fed in response to the higher oil price and the possible second round effects that might come through.
"The higher expected interest rates in the US are supporting the US dollar which has strengthened in response. This is having a negative effect on the rand. At the same time, the higher rates are also eroding the price of gold and South Africa’s other export commodities. This means our terms of trade are gradually weakening which will also lead to a softer domestic currency," Wapenaar said.
ashley.lechman@nationalmg.co.za