Rand Gains Versus Euro, Bonds Advance on Europe Growth Concern

Aug. 16 (Bloomberg) -- The rand advanced versus the euro and bonds extended gains after a report showing European growth slowed more than economists forecast, fueling speculation of more currency-debasing monetary stimulus.

South Africa’s currency gained as much as 1.6 percent to 10.1474 per euro, and traded 0.7 percent stronger at 10.2389 as of 3:43 p.m. in Johannesburg. The rand rose 0.4 percent to 7.1161 per dollar.

The euro retreated from a three-week high versus the greenback and weakened against most of its major peers after the region’s growth slowed to the least since 2009, with Germany’s expansion almost stalling. The European Central Bank spent a record amount on government bonds last week as it began buying Italian and Spanish securities to contain the region’s debt crisis. More monetary stimulus may fuel inflation in the euro-region.

“The ECB has gotten very aggressive, and that’s bullish for the rand,” Chris Becker, an analyst at Econometrix Treasury Management, which advises companies on currency and bond purchases, said by phone from Johannesburg. “The German and other EU growth data shows that when the ECB stepped on the brakes, that resulted in lower growth. They’re going to have to create more money supply.”

Gross domestic product in the euro area rose 0.2 percent from the first quarter, when it increased 0.8 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to expand 0.3 percent, according to a Bloomberg survey. German GDP, adjusted for seasonal effects, rose 0.1 percent from the first quarter, when it jumped a revised 1.3 percent, the Federal Statistics Office said.

U.S. Recovery Doubt

“We already have serious doubts about the U.S. recovery,”

Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Capital, a unit of South Africa’s fourth-biggest bank, said by phone. “If Germany, which is the engine of the EU economy, has marginal growth, that sets the alarm bells ringing.”

The eurozone accounts for 45 percent of South Africa’s exports, according to Department of Trade and Industry data. Slowing demand for South Africa’s metal exports would damp demand for shares in the country’s mining companies and the currency needed to buy them.

Four-Year Yields Record

Bonds gained, driving the yield on 2015 notes to a record low, as signs of slowing growth in the U.S. and Europe drew investors to the nation’s relatively high-yielding debt.

The 13.5 percent notes due 2015 added 34 cents to 123.26 rand, pushing the yield down nine basis points, or 0.09 percentage points, to 6.84 percent, the lowest on a closing basis on record, according data compiled by Bloomberg. The yield has dropped 111 basis points from its 2011 high reached on March 8.

The rally in South African bonds “is purely foreign-driven,” Andre Roux, who oversees about 30 billion rand ($4.2 billion) of bonds at Cape Town-based Investec Asset Management, said by phone. “It is more a response to global yields coming down; we’re moving in sympathy rather than opposition to them.”

Foreign investors have bought 4.7 billion rand of South African bonds in the past two weeks, even as they sold 5.9 billion rand of stocks as risk aversion rose after Standard & Poor’s cut the U.S.’s credit ratings on Aug. 8. The extra yield investors receive for buying South African four-year bonds over U.S. Treasuries is 6.13 percentage points, according to data compiled by Bloomberg. The spread has widened from 5.11 percentage points on Jan. 5.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net