June 18 (Bloomberg) -- The rand led major-currency gains, strengthening the most in six weeks, after South Africa’s current-account deficit unexpectedly narrowed.
The currency of Africa’s second-largest economy advanced 1 percent to 10.7320 per dollar by 4 p.m. in Johannesburg, the biggest gain among 16 major currencies tracked by Bloomberg and the steepest advance on a closing basis since May 8. That pared a 1.5 percent slump in the previous three days after Standard & Poor’s downgraded the nation’s debt on June 13 and Fitch Ratings lowered its outlook to negative from stable. Yields on government bonds due December 2026 dropped two basis points, or 0.02 percentage point, to 8.43 percent.
The gap on the current-account narrowed mainly because of lower dividend payments from companies to foreign investors, offsetting a deterioration in the trade deficit as a weaker rand boosted import costs. Further improvements depend on restoring production amid a 20-week strike in the nation’s platinum belt and the avoidance of any more disruptions in the economy, according to HSBC Holdings Plc.
“In the near term this will help reduce the country’s external vulnerability,” David Faulkner, a Johannesburg-based economist at HSBC Holdings Plc, said in an e-mailed note. “However, celebrating the narrowing deficit may be premature. We would be surprised if the improvement is sustainable.”
The current-account gap shrank to 4.5 percent of gross domestic product in the three months through March, from 5.1 percent the previous quarter. The median estimate of 22 economists in a Bloomberg survey was for a shortfall of 6 percent. The rand has weakened 7 percent over the past 12 months, the most among major currencies.
The improvement in the current account is “not as good as it looks,” Shilan Shah, Africa economist at Capital Economics Ltd. in London, said in an e-mailed note. The drop in repatriated profits for foreign-owned companies “is a reflection of a weak domestic economy rather than an improvement in external competitiveness,” he said.
South Africa’s consumer price index rose by the most in almost five years in May, soaring to 6.6 percent from 6.1 percent in April, a separate report showed. That is compounding a policy dilemma for the South African Reserve Bank, which left its key interest rate unchanged last month as the economy slowed, while saying it remains in a “tightening cycle.”
Forward-rate agreements starting in 12 months, used to speculate on interest rates, dropped six basis points today to 7.09 percent, suggesting investors are scaling back expectations of rate increases. The contracts are pricing in about 1.3 percentage points of rate increases in the next year, down from as much as 2.4 basis points at the end on January.
“The Reserve Bank has, obviously, become more concerned about higher inflation, but the extreme weakness in the domestic economy is equally concerning,” Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg, said in an e-mailed note. “We expect interest rates to remain unchanged for the remainder of 2014.”
The economy contracted an annualized 0.6 percent in the three months through March. S&P cut its growth forecast for this year to 1.9 percent when it lowered its assessment on South Africa’s creditworthiness to BBB-, one level above junk, which would be the same pace of expansion recorded in 2013.
The rand has slumped 3.6 percent in the past month on speculation the Federal Reserve will continue to curtail monetary stimulus, reducing demand for higher-yielding assets. South Africa relies on investment in its bonds and stocks to finance the current-account deficit.
Foreign investors sold 505 million rand ($47 million) of South African bonds yesterday, paring inflows this year to 11.3 billion rand, according to Johannesburg Stock Exchange data. The Fed’s Federal Open Market Committee will probably cut monthly bond purchases by $10 billion to $35 billion today, according to all 44 economists in a Bloomberg survey.
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