A boost in US Treasury yields saw capital move away from emerging markets, with the rand taking a knock, losing ground from gains made earlier in the week.
By 11:44, the local currency was trading 0.83% weaker at R12.71 to the US dollar.
"The South African currency weakened as emerging market sentiment soured again due to rising US bond yields and an uptick in geopolitical risk in the Middle East," NKC Africa Economics said in a note on Friday.
Mpho Tsebe, RMB economist, said the rand and other emerging market currencies are again on the back foot due to rising US yields and a strengthening US dollar,. She explained that US Treasury yields, driven by "upbeat economic data", rose above 3.1% in Thursday’s trade session and closed at 3.11%.
According to Andre Botha, senior currency dealer at TreasuryONE, rising Treasury yields diminish the attractiveness of emerging markets. "This brings further risks into play especially with emerging market currencies, as a firmer dollar and higher interest rates create challenges for EM counties with massive external deficits and budget deficits."
Higher oil pries
Tsebe warned of the higher oil prices as Brent crude oil hit $80 per barrel on growing concerns over supply disruptions from the Middle East to Venezuela, and on signs a global glut has dwindled.
"High oil prices tamper growth of oil-importing countries and cause inflationary pressures, leading to tighter monetary policy, which does not bode well for global output," she said.
"Saudi Arabia committed to work with other oil producers to alleviate supply shortages, however, this has not provided relief to rising oil prices."
Tsebe said that the South African Reserve Bank’s Monetary Policy Committee (MPC) will likely revise the inflation profile due to the rising oil prices, and the weaker currency.
"Since the March meeting, oil prices have edged higher and are now close to $80/bbl compared to the bank’s forecast of $63/bbl for this year and $62/bbl over the next two years."
Tsebe said the SARB could be cautious and leave rates unchanged at 6.5% in light of aggressive monetary policy of advanced countries.
Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions shared views that higher oil prices and the weaker rand "paints a dire picture" for inflation.
Rand worst EM currency
Botes said sustainability of the rand’s gains earlier this week was "doomed from the start". "Logically its excessive strength was soon to be followed by a correction.
"The rand this week is one of the worst emerging market currencies, followed closely by the Turkish lira and the Hungarian forint," she said.
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