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Rand Weakens as Yields Fall to Record on Rate-Cut Speculation

The rand fell to its lowest level this month as bond yields dropped to a record on speculation South Africa’s central bank will follow Brazil and Korea in cutting interest rates to stimulate growth.

South Africa’s currency retreated as much as 1.4 percent to 8.3645 per dollar, the weakest since June 29. It traded 1.3 percent down at 8.3544 as of 3:40 p.m. in Johannesburg. Yields on the nation’s 6.75 percent bonds due 2021 fell four basis points, or 0.04 percentage point, to 7.03 percent, set for the lowest close according to data compiled by Bloomberg. The yield fell below 7 percent for the first time in earlier trading.

The Bank of Korea unexpectedly cut borrowing costs for the first time in three years while Brazil trimmed its benchmark rate for the eighth straight time, reigniting concerns the global economy is slowing. Commodities, which account for 45 percent of South Africa’s exports, dropped and emerging-market stocks headed for the longest losing streak since November.

“Domestically the rate-cut fever continues to intensify,” Quinten Bertenshaw, a Johannesburg-based analyst at ETM Analytics, wrote in e-mailed comments. “Throughout this week we have favoured trading off a long-dollar base and this has not changed.”

Forward-rate agreements, used to speculate on interest rates, dropped two basis points today to 5.17 percent, the lowest since November. The rate is 41 basis points lower than the Johannesburg Interbank Agreed Rate, indicating traders see more than an 80 percent chance of a rate cut in the next six months.


The central bank, which aims to keep inflation within a 3 to 6 percent target range, has left its benchmark repurchase rate at 5.5 percent since November 201. The Monetary Policy Committee meets on July 19 to discuss borrowing costs.

Inflation eased to 5.7 percent in May from 6.1 percent a month earlier, the slowest pace of increase in prices since September. Inflation is on a declining trend and will probably remain within the range through 2014, Reserve Bank Governor Gill Marcus said on July 4.

The risks for the economy slowing more this year have increased, Finance Minister Pravin Gordhan said in an interview in Los Cabos, Mexico, on June 16. Gross domestic product expanded 3.1 percent last year and will rise 2.7 percent this year, Gordhan said in his Feb. 22 budget.

A rate cut would damp appetite for the rand from investors who borrow in dollars to invest in high-yielding currencies. The rand is forecast to return 6.7 percent this year in the so-called carry trade, according to Bloomberg’s calculations based on current market rates and currency forecasts.

“Interest-rate differentials do matter for the currency, and especially so in a global financial-market environment where there is little growth to be had, and which is thus characterised by a reach for yield, risk-on and risk-off dynamic,” Bruce Donald, a currency strategist at Standard Bank Group Ltd. in Johannesburg, said in e-mailed comments.

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