The rand is set to extend its slump from the weakest level since 2009 as quickening inflation exacerbates challenges for South Africa’s economy, already reeling after mining strikes, according to Societe Generale SA.
The rand retreated as much as 1.9 percent to 9.0092 a dollar yesterday, weakening past 9 for the first time in three years and making it the worst performer among emerging-market and major currencies monitored by Bloomberg. The currency slipped after debt-cutting efforts for Greece stumbled, damping demand for risky assets, and as South African inflation quickened more than estimated in October.
The nation’s bonds have returned 0.5 percent in rand terms since Oct. 1, when Citigroup Inc. included them in its World Government Bond Index. That’s less than the total return on all government debt in Europe and New Zealand, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Policy makers are trying to ward off inflation threats while supporting an economy that’s set to expand at its slowest pace since a 2009 recession.
“The central bank wants a weaker rand and they’ve delivered it,” Guillaume Salomon, an emerging-markets fixed income strategist at Society Generale in London, said by phone yesterday. “Be careful what you wish for. Once the weakness started, it’s hard to control when it stops. I have a strong feeling that we are going to see higher dollar-to-rand levels going forward, maybe 9.20 to 9.30,” he said.
South Africa’s currency last traded at or above 9.30 a dollar on April 2, 2009. While the Reserve Bank doesn’t target a specific level for the rand, a weaker currency may improve the competitiveness of the nation’s exports, Governor Gill Marcus said Oct. 10.
In July, the bank surprised economists by reducing the benchmark interest rate for the first time in 20 months. The growth outlook has deteriorated since then as the worst labor unrest in almost two decades slashed mining exports while fuel prices and the weaker rand threaten to push inflation outside of the bank’s 3 percent to 6 percent target band.
“They want a slightly weaker currency to help growth,” Salomon said. “A lot of people who bought South African bonds after Citigroup included them into the index will find the position is not performing brilliantly. The discontent may hit the rand further.”
The currency weakened less than 0.1 percent to 8.9527 per dollar at 9:53 a.m. in Johannesburg. Yields on government’s 6.75 percent bonds due March rose one basis point to 6.66 percent.
The currency may strengthen against the dollar today as the decline yesterday was “overdone,” researchers at Johannesburg- based Rand Merchant Bank said in an e-mailed note to clients. “The positive global backdrop provides scope for moves back to 8.90,” it said.
A Chinese manufacturing index signaled the first expansion in 13 months, while a U.S. report showed fewer people filed applications for unemployment benefits. Leaders of the 27 EU nations gather today for negotiations in Brussels. Israel and Hamas agreed to a cease-fire after a week-long conflict. The rand will probably be the best performing of 16 major currencies in 2013, gaining 8.3 percent to 8.27 a dollar, according to the median estimate of 30 analysts in a Bloomberg survey.
Inflation accelerated to 5.6 percent in October from 5.5 percent a month earlier, Pretoria-based Statistics South Africa said on its website yesterday. The median estimate in a Bloomberg survey of 23 economists was 5.4 percent. The central bank’s Monetary Policy Committee meets today to review borrowing costs.
“The Reserve Bank will leave interest rates unchanged,” Annabel Bishop, a Johannesburg-based economist at Investec Ltd., said in e-mailed comments. “Inflation is likely to continue to rise this year,” exceeding the target range “for a significant period in 2013,” she said.
The MPC will retain the key rate at 5 percent, the lowest level in more than 30 years, according to all 23 economists in a Bloomberg survey.
Two-year interest-rate swaps, used to lock in borrowing costs, climbed six basis points, or 0.06 percentage point, to 5.07 percent after the inflation data was released, signaling that investors are pricing in a chance of an increase in borrowing costs over the next two years.
The rand’s three-month implied volatility against the dollar dropped six basis points yesterday to 13.8 percent, indicating that options traders expect smaller swings in the currency in the coming months. The rand’s volatility remains the highest out of emerging-market and major currencies monitored by Bloomberg.
The currency’s underperformance against emerging-market peers “tells us that the local unit remains exceptionally vulnerable,” researchers at Tradition Analytics said in a note. “It only goes to reaffirm the argument for anticipating further rand weakness in the weeks and months ahead.”