Analysts are divided between expectations of a short-lived but intense conflict and the possibility of a more prolonged war, with Donald Trump suggesting a potential duration of four to five weeks. A prolonged war would have significantly broader and more severe economic consequences, as well as a further disruptive impact on global financial markets.
On 28 February the United States and Israel launched a wide range of coordinated strikes on the Iranian military as well as political targets. Iran responded shortly thereafter with attacks across the Gulf States and Israel.
The initial response by financial markets (in the US) to the start of the Iran war was the combination of a slightly weaker equity markets, the buying of some “safe haven” assets such as the US dollar, a slight upward drift in US bond yields, and a sharp rise in the oil price. Since then, most of these trends have continued, although in some instances the market’s reaction has become a little more pronounced. For example, the S&P 500 equity index is down only 0.1% since 28 Feb, the US 10-year bond yield has weakened by 10bps but is still well below the yield at the start of Feb, the Dollar has strengthened by 1.4% against the Euro, but the oil price has risen by a hefty 12.9%. Understandably, it is the sharp increase in the oil price which is more concerning investors.
In other countries the gyration in financial markets has been much more severe, but overall, the rise in the oil price and its implications for inflation, growth and interest rates is dominating most market conversion – with the clear understanding that the longer the Iran war last and more its spreads to other countries the more severe the implications become.
Since 28 Feb the Rand has weakened by around 4.1% against the US Dollar and is down 2.5% on a trade-weighted basis. In comparison, the emerging market currency index has depreciated by a more modest 1.7% over the same period. Interestingly, the South African rand is the 3rd worst performing emerging market currency in March. This is largely understandable given the country’s vulnerability to a spike in international oil prices as well as the fact that the Rand is a highly tradable and liquid EM currency that tends to quickly reflect changes in global investor sentiment.
Prior to the start of the Iran war the Rand had enjoyed an extended phase of out-performance. This reflected a combination of factors including a sustained improvement in SA’s terms of trade, increased macroeconomic stability, and evidence of policy reform that is focused on improvement SA’s economic rate of growth.
Most recently, the National Budget on 25 February endorsed the Government’s commitment to fiscal consolidation and support for private-public sector reform initiatives to help develop the country’s ailing infrastructure. South Africa’s improving economic fundamentals suggest that if there is a relatively quick end to the Iran war then the Rand would be expected recoup most of its recent weakness as the economic fundamentals re-assert their influence on financial markets.
Lastly, the combination of a higher oil price and weaker exchange rate means that there is now a very significantly under-recovery on SA’s petrol and diesel price. This will likely ensure that the SARB continues to adopt a cautious approach to any further reduction in interest rates given their acute focus on achieving South Africa’s new inflation target of 3%. While higher interest rates can be viewed as positive for a currency, the heightened trade and economic policy uncertainty may undermine economic activity and result in downward revisions to GDP growth forecasts.
There remains a myriad of scenarios regarding the outcome of the Iran war – although the key uncertainty is the duration of the conflict. The longer the war lasts the more disruptive it will be more financial markets and the more likely it is to accelerate capital outflows from higher-risk investments (including emerging markets) toward traditional safe-haven assets. Strong domestic fundamentals should remain an important near-term anchor for the rand, but this is clearly not enough to ensure sustained Rand strength/stability should the conflict escalate or become significantly more protracted.
We maintain our view of a modestly weaker rand over the long term, in line with inflation differentials (albeit narrowed) and including a country risk premium. Currency diversification remains important from various perspectives: Concentration risk (South Africa is small in a global context); opportunity risk (other countries may have periods of outperformance); currency risk (less political and economic risk) and country risk (structural constraints can undermine currency returns). Timing currency transactions is incredibly difficult. Given the rand’s inherent volatility, it remains prudent to average out offshore transactions on a regular basis by utilising prescribed calendar year allowances.
The Advantage Currency Decoder, by Dr Lance Vogel, estimates fair value at R17.89/USD, with current market at R16.60/USD (closing rate 5 March 2026). The Advantage Currency Decoder has demonstrated a remarkable ability to provide very useful signals for determining whether to buy, sell or wait on trading a currency pair, and not only for the USDZAR exchange rate. The Decoder can be used to analyse any currency pair, without the need for any modifications or alterations to the internal algorithms as the currency pair changes.
Source: Advantage FX Solutions fx@advantageteam.co.za