The rand slumped to a four-year low and bond yields rose to the highest levels in eight weeks on speculation of a tapering in U.S. stimulus measures and as the South African economy stagnates.
Consumer confidence in the U.S. rose in May and a report tomorrow may show the world’s biggest economy expanded 2.5 percent in the first quarter. South Africa’s worst economic performance since the 2009 recession is heightening the risk of sovereign downgrades amid prospects of prolonged labor unrest.
“One leg of the dollar-rand move is simply the strength of the dollar,” spurred by “optimism that the U.S. will be in a self-sustaining recovery by 2014,” John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg, said in e-mailed comments. “The moves have been further compounded by local factors. Local sentiment is still so extremely negative that the market hardly needs any news to sell off.”
South Africa’s currency depreciated as much as 0.7 percent to 9.8574 per dollar, the lowest level since March 18, 2009. It traded 0.2 percent down at 9.8061 by 3:40 p.m. in Johannesburg, bringing its depreciation this month to 8.6 percent, the worst performance out of 16 major currencies monitored by Bloomberg.
Yields on benchmark 10.5 percent bonds due December 2026 rose 13 basis points, or 0.13 percentage point, to 7.32 percent, the highest on a closing basis since April 3 and following a 10 basis-point advance yesterday. The yield has climbed 58 basis points this month.
Fed Chairman Ben S. Bernanke said last week the central bank could cut the pace of asset purchases, which have contributed to demand for higher-yielding emerging-market bonds, if officials see indications of sustained improvement in economic growth. Ten-year U.S. yields rose the highest in four months as bonds worldwide headed for the steepest monthly loss in almost a decade.
“Liquidity trades -- including the rand and other high-yielding currencies -- have been further hurt by worries that U.S. quantitative easing could be halted sooner rather than later,” Cairns said.
South Africa’s gross domestic product expanded 0.9 percent in the first quarter, less than the most pessimistic forecast of 15 economists in a Bloomberg survey, as manufacturing and agriculture contracted, Statistics South Africa said yesterday.
Slower growth may curb tax revenue and make it harder for the government to rein in its budget deficit, a concern raised by Moody’s Investors Service and other rating companies when downgrading South Africa in the past eight months. Looming strikes in the mining industry as wage talks get under way are further clouding the outlook.
“South African yields have weakened as a result of both the global trend as well as the weaker rand and poor foreign demand,” Brigid Taylor, head of institutional flow sales at Nedbank Group Ltd. (NED) in Johannesburg, said in an e-mail. “We are at the mercy of social tensions and knock-on negative offshore sentiment amid U.S. strength.”
Foreign investors sold a net 501 million rand ($51 million) of South African bonds yesterday, bringing net outflows this month to 635 million rand, according to the JSE Ltd., which runs the nation’s stock and bond exchanges.
Weakness in emerging-market currencies including the rand could last for the next two years as expectations of further quantitative easing by the Fed recede, Manik Narain and Bhanu Baweja, strategists at UBS Ltd. in London, said in a note e-mailed to clients today.
“Trading patterns suggest that the market is now looking for quality rather than yield,” they wrote. “The large emerging-market current-account deficit economies such as South Africa, India and Turkey are seeing their currencies being hit harder than the others.”
South Africa’s current-account gap, which measured 6.5 percent of gross domestic product in the fourth quarter, is the fourth biggest of about 60 countries tracked by Bloomberg.
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