Rand Falls to Month-Low as Inflation Slows; Bond Yields Decline

The rand dropped to its lowest level in a month against the dollar and bonds gained after South Africa’s inflation rate unexpectedly fell in February, prompting investors to pare rate-increase expectations.

South Africa’s currency slipped as much as 1.3 percent to 7.7501 per dollar, the weakest since Feb. 22. It traded 0.9 percent weaker at 7.7203 as of 3:07 p.m. in Johannesburg. The yield on the nation’s 65 billion rand of 13.5 percent bonds due 2015 dropped 1.5 basis points, or 0.015 percentage point, to 6.92 percent.

The consumer inflation rate slowed to 6.1 percent from 6.3 percent in January, the first decline in a year, Statistics South Africa said on its website today. The median estimate of 14 economists was 6.4 percent. The South African Reserve Bank, led by Gill Marcus, has kept the benchmark repurchase rate at 5.5 percent since November 2010. The bank aims to keep inflation in a 3 percent to 6 percent target range.

“The market will be cheered by this inflation print,” Razia Khan, the London-based head of Africa research at Standard Chartered Plc, said in e-mailed comments. “The immediate market reaction is likely to be that this allows the Reserve Bank to keep interest rates on hold a while longer, despite the more hawkish comments we’ve had from Governor Marcus lately.”

Three-month forward-rate agreements starting in December shed 10.5 basis points to 5.975 percent. The contracts, which give an indication of investors’ expectations of interest rates, had climbed to an eight-month high yesterday after Marcus said on March 15 recent data signaled inflation was becoming “more generalized” as demand in the economy picked up.

Carry Trade

Higher interest rates would boost rand returns for investors who borrow dollars to invest in higher-yielding currencies, known as the carry trade. The rand has returned 6.5 percent in the dollar carry trade this year, according to data compiled by Bloomberg.

“Despite some recent warnings from the Governor concerning core inflation, we still expect the Monetary Policy Committee to maintain its accommodative stance until the downside risks to economic growth fade more compellingly in late 2012 and early 2013,” Dennis Dykes, chief economist at Nedbank Group Ltd. in Johannesburg, and colleagues, wrote in a e-mailed note today.

Earlier, the rand declined after a report showed manufacturing in China, the biggest buyer of South Africa’s exports, may contract for a fifth straight month in March.

The preliminary reading of China manufacturing for March from HSBC Holdings Plc and Markit Economics fell to 48.1, a four-month low, from a final 49.6 in February. A result above 50 points to an expansion and a number below 50 indicates contraction. The Standard & Poor’s GSCI Index of commodities dropped as the prices of metals including copper and nickel declined. Raw materials account for 65 percent of South Africa’s exports, according to government data.

The Chinese manufacturing data “should have some impact on the rand, given South Africa’s economic reliance on China”, Nomvuyo Guma, a currency strategist at Standard Bank Group Ltd. in Johannesburg, said in e-mailed comments.

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