South African Rand coins are seen in this illustration picture taken October 28, 2020. REUTERS
May 25 (Reuters) – The South African rand strengthened in early trade on Monday supported by easing oil prices, as investors weighed the prospects of a breakthrough in U.S.-Iran peace negotiations ahead of a local interest rate decision later in the week.
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At 0541 GMT the rand traded at 16.3375 against the dollar , about 0.8% up from its previous close.
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Oil prices hit two-week lows on Monday on optimism that the U.S. and Iran were moving closer towards a peace deal even though both countries remained at odds over key issues.
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On Saturday, U.S. President Donald Trump said Washington and Iran had “largely negotiated” an understanding on a peace deal that would reopen the Strait of Hormuz, which carried a fifth of global shipments of oil and liquefied natural gas before the conflict.
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Domestically focused investor attention will be pinned on the central bank’s rate decision on Thursday.
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Economists at Nedbank expect the monetary policy committee to raise interest rates by 25 basis points, taking the repo rate to 7% and the prime rate to 10.50%.
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“Our analysis suggests that inflation expectations are particularly sensitive to petrol price increases, and we therefore see a relatively high risk of second-round effects. As such, tightening monetary policy now would ensure that the inflationary consequences of the supply-side shock are temporary and likely minimise the need for more severe tightening later in the cycle,” the bank’s economists said in a research note.
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Economic indicators due this week include the composite leading business cycle indicator on Tuesday, and producer inflation data on Thursday.
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South Africa’s benchmark 2035 government bond also strengthened in early deals, as the yield fell 4.5 basis points to 8.635%.
Reporting by Anathi Madubela; Editing by Alison Williams
