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Rand Declines Most in 2 Weeks on S&P Downgrade, Chinese Demand

The rand depreciated the most in two weeks after Standard & Poor’s lowered South Africa’s credit rating outlook and commodities fell on signs of slowing demand from China, the world’s biggest copper consumer.

South Africa’s currency slid as much as 1.4 percent, the most since March 14, and traded 1.3 percent weaker at 7.6992 per dollar as of 4:50 p.m. in Johannesburg, the worst performer of 16 major currencies monitored by Bloomberg. The yield on 8.25 percent bonds due 2017 was little changed at 7.399 percent.

S&P affirmed South Africa’s foreign-currency debt rating of BBB+ and the outlook was cut to negative because of slower economic growth and a risk the government may not be able to control spending to rein in the fiscal deficit. South African economic growth will slow to 2.7 percent this year, according to the government, as Europe falls into recession, reducing demand for manufactured goods from the continent’s largest economy.

“It’s a knee-jerk reaction; I think it’s been overdone,” Ian Cruickshanks, head of treasury strategic research at Johannesburg-based Nedbank Group Ltd., said by phone. “What are mentioned as the difficulties are known and have been taken into account by the currency markets.”

Falling commodity prices and weaker equity markets were also weighing on the currency, Ion de Vleeschauwer, the Johannesburg-based chief dealer at Bidvest Bank Ltd., the nation’s biggest chain of money-changers, said by phone.

“Commodities and gold are also coming under pressure. China is under scrutiny as their growth rate is also going to be lower,”


China’s copper demand based on trade data climbed 26 percent in January and February from a year earlier, down from 30 percent growth in December, Standard Chartered Plc said in a report yesterday. Chinese demand may increase this year at the slowest pace since the 2008 financial crisis, Wei Jianghong, chairman of Tongling Nonferrous Metals Group Co., said this month. Premier Wen Jiabao set a 2012 economic growth target of 7.5 percent this month, compared with an 8 percent goal over the past seven years.

Copper for three-month delivery fell as much as 2.2 percent, its first decline in four days. Commodities including metals account for 64 percent of South Africa’s exports, according to government data. The nation has the world’s biggest reserves of platinum, manganese and chrome. Currencies of other commodity producers including Australia, New Zealand and Canada also weakened.

Earlier, Reuters reported that South Africa’s Government Employees’ Pension Fund may invest about $22 billion of the $150 billion it manages outside the country, citing actuarial head John Oliphant. That may add to rand weakness, John Cairns, a currency strategist at Johannesburg-based Rand Merchant Bank, said by phone.

“There is little indication of how much of the additional investment has already been done and how quickly the diversification into foreign assets will take place,” he said in a separate note to clients.

Interest Rates

South Africa’s central bank may keep borrowing costs unchanged tomorrow for a record 16 months after inflation slowed in February, easing concern that price pressures may be spreading in the continent’s largest economy.

The Monetary Policy Committee, led by Governor Gill Marcus, will leave the benchmark rate at 5.5 percent, according to all 18 economists surveyed by Bloomberg. Marcus is due to announce the decision in a televised press conference that begins at about 3 p.m. local time in Pretoria.

Maintaining rates above the level of South Africa’s trading partners may support the local currency, George Glynos, an economist at Johannesburg-based ETM Analytics, wrote in e-mailed comments today.

“This to some extent will stand the rand in good stead and perhaps help offset some of the underlying rand negatives that are building thanks to the accumulation of credit and the faster growth in money supply,” Glynos said.

Money Supply

South African credit expanded at the fastest pace in more than 2 1/2 years in January, easing pressure on the central bank to provide more stimulus to the economy, the Reserve Bank said on its website on Feb. 29. The broad M3 measure of money supply rose 6.6 percent in January from a year earlier, from 8.2 percent in December, the central bank said. The median estimate in a Bloomberg survey was 8.6 percent.

Three-month forward-rate agreements starting in December shed two basis points to 5.975 percent. The contracts give an indication of investors’ expectations of interest rates.

The rand has advanced 5.5 percent this year, heading for its best first quarter since 2004. It declined 18 percent last year, the second-worst performance by an emerging-market currency after Turkey’s lira.

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