The rand plunged to the weakest level in more than 13 years against the dollar after U.S. jobs data exceeded economists’ expectations, increasing pressure on South Africa’s central bank to raise borrowing costs.
The currency of Africa’s most-industrialized economy slumped as much as 2.7 percent to 12.7105 per dollar, the lowest level since December 2001, before paring some of the losses. Yields on forward-rate agreements starting after the next Monetary Policy Committee meeting in July jumped to the highest in almost five years.
South African policy makers have kept borrowing costs unchanged since July to help support an economy that’s been hit by strikes and power cuts. Inflation risks, including currency weakness, are rising, with the rand likely to come under more pressure as the Fed tightens monetary policy, Reserve Bank Governor Lesetja Kganyago said on May 21.
“If the rand stays around these levels, certainly the probability of a hike at the next MPC meeting will increase,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. Nedbank’s view is that the central bank will lift the policy rate in September, he said.
The rand traded 1.8 percent weaker at 12.6039 per dollar by 3:37 p.m. in Johannesburg. A close at this level would be the weakest closing price on record, according to data compiled by Bloomberg. The currency’s 14-day Relative Strength Index rose above the 70 level that indicates to some traders it’s oversold for the first time since March 16.
Inflation quickened to 4.5 percent in April from 4 percent in the previous month, remaining within the bank’s 3 percent to 6 percent target band for an eighth month. The inflation rate will exceed 6 percent in the first quarter of next year and remain close to the upper end of the target for the rest of the forecast period, according to the central bank.
Payrolls in the U.S. climbed in May by the most in five months and worker pay accelerated, a report showed on Friday. The 280,000 advance in payrolls exceeded the median forecast of 226,000 in a Bloomberg survey and followed a revised 221,000 April increase. A review of South Africa’s credit rating by Fitch Ratings, scheduled for later on Friday, added to risks for the rand, Nalla at Nedbank said. Fitch rates South Africa BBB, the second-lowest investment grade, with a negative outlook.
Forward-rate agreements starting in two months climbed two basis points to 6.36 percent, or 23 basis points above the benchmark Johannesburg Interbank Agreed Rate, indicating that traders are pricing in close to a 100 percent probability of a 25-basis point increase in the central bank’s policy rate next month.
“With these fantastic U.S. numbers, the rand is going to continue collapsing,” Ion de Vleeschauwer, chief dealer at Bidvest Bank Ltd. in Johannesburg, said by phone. “It’s not good at all. It’s going to be problematic for growth and the economy as a whole.”