The rand’s tumble to the lowest level in more than 13 1/2 years risks forcing South Africa’s central bank into a steeper interest-rate increase to ward off inflation and entice investors to buy the nation’s assets.
The currency of Africa’s most industrialized economy dropped to 12.8282 per dollar on Wednesday, the lowest since December 2001, on speculation the Federal Reserve will raise interest rates next month, which would draw investors to the dollar. The rand may weaken to 13 before the end of the year, according to London Capital Group Ltd.
A depreciation in the currency “is just going to boost inflationary pressures,” Ipek Ozkardeskaya, a market analyst at the London-based trading and advisory firm, said by phone. “This might in turn require a tighter tone from the South African Reserve Bank. If the Fed moves, the SARB can move more and step into a proper tightening cycle in order to curb the selling pressures in the rand and remain in control of prices.”
Reserve Bank Governor Lesetja Kganyago raised the benchmark lending rate for the first time in a year last month as the rand’s 9.6 percent slide against the dollar this year, and potential increases in the costs of food and electricity, threaten to push inflation above the upper 6 percent target band. Policy makers had been on hold since July last year to support an economy hit by strikes, power shortages and falling global metal prices.
The rand on Wednesday dropped with developing nation currencies including South Korea’s won and Malaysia’s ringgit after Fed Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that it would take a significant deterioration in U.S. economic data to convince him to put off increasing rates in September.
The rand weakened as much as 0.7 percent before paring losses to trade 0.5 percent down at 12.8018 by 5:51 p.m. in Johannesburg. A close at this level would be the weakest on record. Yields on government rand-denominated bonds due December 2026 jumped 6 basis points to 8.27 percent.
Markets now have “little doubt about a U.S. hike,” Mohammed Nalla, head of strategist research at Nedbank Group Ltd., said in a note to clients. “This combined with a plethora of negative headlines regarding the local economy are unlikely to provide any comfort for the rand.”
A report on Wednesday showed South Africa’s manufacturing industry contracted for a second month, with Standard Bank Group Ltd.’s Purchasing Managers’ Index for July falling to the lowest in a year. The nation’s car sales dropped more than expected last month, according to a report on Tuesday.
The deterioration in the data and the rand’s decline underline the challenges faced by President Jacob Zuma’s administration in reigniting investment and growth in an economy struggling with 25 percent unemployment. Mining companies plan to cut as many as 10,000 jobs to cope with higher costs and lower prices for their output amid a strengthening dollar that has roiled commodities.
Investors are focused on U.S. monthly payrolls data due on Friday for signs on whether the Fed will raise the near-zero interest rates that have buoyed demand for riskier assets.
“The central bank of South Africa might go for a little bit more tightening to give the market the signal that they are there,” London Capital Group’s Ozkardeskaya said. Policy makers also need “to adjust the risk-to-return ratio of the rand so that investors will not leave the country in an accelerated fashion once the Fed starts hiking its rates. What we need right now in the rand is stability for people to stay.”