South Africa’s rand fell to the weakest level in seven weeks, defying a central-bank interest-rate increase as weak Chinese data and the slump in commodity prices weighed on the currency.
The rand retreated as much as 1.9 percent to 12.6819 per dollar, just 3 cents short of the 14-year low it reached on June 5. It traded 1.7 percent weaker at 12.6610 by 3:22 p.m. in Johannesburg, the worst performance on Friday out of 31 major and emerging-market currencies monitored by Bloomberg.
South Africa’s central bank raised borrowing costs for the first time in a year on Thursday, increasing its lending rate by 25 basis points to 6 percent, citing concern that the weaker rand will fuel inflation even as growth slows.
“A 25 basis-point increase is not going to be sufficient to underpin the rand permanently against a background of higher U.S. rates and uncertainty around growth in China,” Nigel Rendell, senior emerging markets analyst at Medley Global Advisors said by phone from London. “It just goes to underline the fact that the currency tends to be fairly wild and volatile at the best of times.”
The rand has dropped 2.5 percent against the dollar this week, bringing its decline in 2015 to 8.5 percent. The currency’s three-month implied volatility against the dollar jumped 113 basis points on Friday to 13.6 percent, indicating that options traders see wider price swings in coming months.
The slump came after China’s preliminary Purchasing Managers’ Index fell to its lowest in 15 months. China is the biggest buyer of South Africa’s raw materials. A Bloomberg index tracking commodity prices fell to its lowest level since March 2002.
Expectations of Fed rate increases threaten inflows that fund South Africa’s current account gap, adding to pressure on the rand, Bernd Berg, director of emerging market strategy at Societe Generale, said in a note to clients.
The rand may head to 13 per dollar in the short term as the U.S. currency strengthens, Berg said in a note recommending investors buy dollars versus the rand, targeting a level of 13.20.