Rand’s Record Plunge Seals Case for South African Rate Rise

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The rand’s slump to a record against the dollar has laid to rest any doubt traders were having about South African rate increases.

Forward-rate agreements, used to speculate on interest rates, are pricing in at least a 25 basis points rate increase at each of the next two policy meetings. Before the rand’s fall to as low as 14.0682 per dollar, the contracts predicted only a 50 percent probability of an increase next month.

South Africa’s currency tumbled the most since October 2008 in thin Asia trading that exaggerated moves on Monday on concern lower prices for commodities, which account for more than half of the nation’s exports, will deepen as China’s economy slows. The rand slid amid a selloff of emerging-market assets, with Chinese shares sinking by the most since 2007 and raw-material prices dropping to a 16-year low.

“They’ll probably be forced to hike interest rates just to keep the rand from weakening even further,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank Ltd., said by phone from Johannesburg. “It’s not good news for the local market because it’s going to put a massive damper on economic growth.”

Forward-rate agreements starting in five months are now pricing in 50 basis points of rate hikes by the end of the year, compared with 35 basis points on Aug. 21.

Currency Oversold

The rand traded 1.8 percent weaker at 13.2026 per dollar as of 1:15 p.m. in Johannesburg on Monday after earlier falling as much as 8.5 percent. The currency’s 14-day relative strength index rose above the 70 level seen by some technical analysts as oversold, jumping to 76.7, the highest since May 2013.

“I can tell you that the sort of pace and that kind of move would be very unnerving for any central banker,” Peter Kent, a money manager at Investec Asset Management, which oversees the equivalent of $118 billion, said by phone from Cape Town. “My experience is when you get price action like this, it’s normally at the beginning of something, not the end of something.”

The Reserve Bank raised its benchmark repurchase rate by 25 basis points to 6 percent in July, the first policy move in a year, to help fight inflation which accelerated to 5 percent in last month. While Governor Lesetja Kganyago said in Aug. 11 the current tightening cycle will be moderate, the central bank has repeatedly said the currency is the biggest risk to prices.

Exchange-Rate Fear

“This type of foreign exchange volatility, even if only in the rand-dollar, I still believe is enough exchange-rate fear for the monetary policy committee to move again,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said. “I think that September is on the table and if anything they will move again because of the currency.”

The five-year break-even rate, which measures expectations for consumer-price growth, climbed 22 basis points since the last rates decision on July 23, to 6.60 percent. The central bank targets inflation between 3 percent and 6 percent and will announce its next policy move on Sept. 23.

“The rand losses make a Reserve Bank September hike more likely,” John Cairns, a currency strategist at FirstRand Ltd.’s Rand Merchant Bank unit in Johannesburg said in an e-mailed note. “They could even move 50 basis points.”

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