The rand has emerged as the most volatile emerging market currency in Bloomberg’s implied volatility rankings, a worrying sign for South African investors already bracing for a shaky global environment. According to Investec chief economist Annabel Bishop, the local unit’s implied volatility eased to 13.73 from a March high of 21.13, but it still sat at the top of the emerging market table, underscoring how exposed the currency remains to sudden swings in sentiment.
That matters because volatility is not just a trader’s headache. For households, it can feed through to fuel prices, imported goods, inflation and ultimately interest rates. In other words, when the rand gets tossed around, ordinary South Africans usually feel it at the petrol pump and in their monthly budgets before long.
Bishop said the pressure is being driven largely by risk-off sentiment linked to the ongoing Iran war. Markets have been reacting nervously to the possibility of wider disruption in the Middle East, especially after tensions around the Strait of Hormuz intensified. That narrow shipping route is one of the world’s most important energy chokepoints, and any prolonged closure can send oil markets into a tailspin.
While the rand is still under strain, there has been some improvement in how global investors view South Africa’s debt risk. Bishop pointed out that the local currency’s position in the credit default swap rankings has also improved, with the spread at 146 basis points, down from 200 basis points at the end of March. That suggests markets are not as panicked as they were a few weeks ago, even if uncertainty remains elevated.
Still, the picture is far from calm. The economist noted that the Brent crude oil price reached $106 a barrel before easing slightly below $105, after concerns grew that supply could be affected for longer than expected. Markets are now beginning to price in the possibility that the Strait of Hormuz may remain closed until the second half of the year, a scenario that would keep fuel prices under pressure.
For South Africa, that is particularly unwelcome. A weaker rand and a firmer oil price is a toxic mix for consumers, because it increases the cost of imported fuel and other essentials. Bishop warned that another fuel price increase is building for June, which would add fresh inflationary pressure and could complicate the Reserve Bank’s thinking on interest rates.
The first half of April had offered a bit of relief, as tensions appeared to cool and oil prices softened. But the recent flare-ups have reversed that trend. Instead of markets settling down, investors are once again focused on supply risks, shipping disruptions and the broader geopolitical fallout from the conflict.
Rand volatility and the local political picture
The rand volatility story is not only about events overseas. There is also a local political layer adding to the uncertainty, with renewed focus on President Cyril Ramaphosa’s Phala Phala foreign currency theft scandal coming back into the spotlight.
Bishop said the issue has not yet caused a major market rout, but it remains a risk that investors are watching closely. The matter returned to centre stage after the Constitutional Court ruled last Friday, 8 May, that Parliament’s 2022 vote to block a report implicating Ramaphosa was unconstitutional. The court said the matter should have been referred to an impeachment committee instead.
That ruling has reopened a politically sensitive chapter for the Ramaphosa administration and has revived tensions inside the Government of National Unity (GNU). It has also emboldened political opponents who have once again called for the president to step aside.
On Monday night, 11 May, Ramaphosa said he would not resign and would rather challenge the independent panel’s report that found against him. For financial markets, that response appears to have been received more calmly than some analysts may have expected. Bishop said the fact that Ramaphosa is staying on has, at least for now, removed one immediate source of uncertainty.
That said, the alternative scenarios were not attractive either. Ipsos polling has shown that Deputy President Paul Mashatile is not widely seen as a popular successor, and that kind of succession uncertainty tends to weigh on investor confidence. In a country already dealing with growth pressures and policy frictions, political instability can quickly become a currency issue.
At the same time, the Reserve Bank is also shaping the rand’s trajectory. Bishop noted that financial markets have not fully priced in US interest rate hikes for the year, while South Africa is still seen as having a higher rate path with possible hikes pencilled in. That difference in rates can support the rand, because it makes local assets comparatively more attractive to investors searching for yield.
Even so, that support may not be enough to offset the impact of a sustained geopolitical shock. As we have reported before, the rand is highly sensitive to both external and domestic headlines, and right now it is getting hit from both sides. Traders tend to move quickly when they sense danger, which is why the currency can weaken sharply even when the underlying economic data has not changed much.
By 09h30 on Tuesday, the rand was already trading weaker against the major currencies. It stood at R16.55 to the US dollar, down 0.9%, at R22.41 to the pound, down 0.5%, and at R19.45 to the euro, down 0.6%. That kind of movement may look modest on a screen, but it adds up in a country where exchange rates affect everything from groceries to airline tickets.
For South Africans watching their wallets, the message is clear: the combination of Middle East tensions, oil price risk, political uncertainty and interest rate expectations is keeping the rand on a knife edge. Until there is more certainty on both the global and local fronts, the currency is likely to remain one of the most closely watched — and most vulnerable — in emerging markets.