The rand slumped to its weakest level in more than a year against the dollar and bonds fell as European officials failed to offer a plan to halt the region’s debt crisis, cutting demand for riskier assets.
The rand declined as much as 3.2 percent to 7.7303 per dollar, its weakest level since July 2010. It traded down 2.8 percent as of 5:04 p.m. in Johannesburg. Against the euro, the rand slipped 1.7 percent to 10.4838.
Commodity prices fell to the lowest level in a month, led by decreases in metals including copper, after European policy makers failed to introduce a plan to stem the region’s sovereign-debt crisis and boost growth. South Africa’s benchmark stock index snapped a four-day winning streak as raw materials producers including BHP Billiton Ltd. and Anglo American Plc dropped. The euro, the currency of 45 percent of South Africa’s export payments, tumbled for a second day.
“You just have to look at the state of the euro for a guide to where the rand is going,” Ion de Vleeschauwer, chief dealer at Bidvest Bank Ltd. in Johannesburg, which runs South Africa’s largest chain of moneychangers, said by phone. “All the troubles swirling around Europe are spilling over into emerging markets and especially the rand, because they’re our biggest trading partner.”
The rand could extend its decline to 8 per dollar in the coming weeks if it breaches 7.75 per dollar, a so-called support level, De Vleeschauwer said. Support or resistance levels are levels where traders cluster orders to buy or sell a currency.
European Union and International Monetary Fund inspectors speak today with Greek Finance Minister Evangelos Venizelos to judge whether the government is eligible for its next aid payment due next month. After a two-day meeting of EU finance ministers and central bankers that ended Sept. 17, Sweden’s Anders Borg said Greece hasn’t done enough to meet its budget targets. The country is struggling to convince critics that it will be able to win a sixth tranche of loans to prevent default.
“Foreigners are very wary of the situation and lightening up on their emerging-market exposure,” De Vleeschauwer said. “We’re in for a rocky ride.”
The rand’s decrease came after the European Central Bank last week said it will lend dollars to the region’s banks as the sovereign-debt crisis fueled concern lenders are facing financing problems, prompting investors to sell riskier, emerging-market assets.
“With banks doubting each others’ solvency, we are at risk of money markets freezing up and so an unwinding of leveraged plays,” John Cairns and Nema Ramkhelawan-Bhana, currency strategists at Rand Merchant Bank in Johannesburg, said in a research note. “Leveraged assets such as the rand are in for a rough ride.”
Bonds slumped, driving yields to the highest in more than a month, on concern the weaker rand will stoke inflation, reducing the central bank’s room to cut interest rates.
The consumer price index likely rose 5.5 percent, from 5.3 percent in July, according to the median estimate of 19 economists in a Bloomberg survey. The Reserve Bank’s Monetary Policy Committee will keep its benchmark interest on hold at 5.5 percent, according to all 12 economists surveyed by Bloomberg.
“Bonds have weakened in tandem with the rand,” Brigid Taylor, head of institutional currency sales at Nedbank Capital in Johannesburg, said by e-mail. “The MPC this week is likely to be hawkish on inflation as the rand weakness looks likely to persist, and as such poses upward pressure on the CPI.”
The 13.5 percent bonds due 2015 dropped 78 cents to 122.26 rand, driving the yield up 20 basis points, or 0.2 percentage point, to 7 percent, the highest since Aug. 12.