- Currency hits oversold levels as Nedbank stays bearish
- Rabobank sees sustainable pullback in rand as unlikely
The rand weakened to a record and South African stocks fell to three-week lows on concern slowing growth in China will weigh on the continent’s second-largest economy.
The rand dropped the most among 31 emerging-market and major currencies tracked by Bloomberg, tumbling as much as 2.1 percent to 16.2027 per dollar on Thursday, as China’s move to weaken the yuan’s reference rate by the most since August spurred a selloff that knocked global equities and currencies, sent oil prices tumbling to 12-year lows and cut prices on commodities from platinum to copper. South Africa’s benchmark share index slid as much as 3 percent to the lowest since Dec. 14, and 10-year bonds ended four days of gains.
“Emerging markets unfortunately remain on the back foot because you’ve got a strong U.S. dollar that’s likely going to remain strong for most of this year, if not get even stronger,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “That’s going to keep commodities on the back foot, it’s going to keep emerging markets in general on the back foot, and that thrown in with the uncertainty around China makes for a rather toxic confluence of events for an economy like South Africa.”
The rand plunged 25 percent against the dollar last year, the worst performance after Brazil’s real among major currencies tracked by Bloomberg. The South African currency has been under pressure because of a slump in commodity prices, lackluster economic growth and rising interest rates in the U.S. It fell to a record low of 16.0543 against the dollar in December after President Jacob Zuma unexpectedly fired his finance minister, and has dropped 4 percent so far this year.
The currency pared its decline to trade 0.6 percent weaker at 15.9584 against the dollar by 5:41 p.m. in Johannesburg on Thursday. That pushed the pair’s 14-day relative strength index to 73, above the 70 level that signals to some technical analysts that the rand’s decline had gone too far, too fast.
“Short term, I expect a pullback just simply because on a technical basis we have been extended for quite some time,” Nalla said. “Usually when you see this kind of price action the market wants a little bit of a breather. So on a technical basis alone I would expect us to pull back maybe into the mid-15s, maybe 15 if we’re lucky; however, longer-term we remain remarkably bearish."
Yields on government rand bonds due December 2026 climbed 4 basis points to 9.61 percent. The FTSE/JSE Africa All Share Index slipped 2.1 percent to 48,052.78 by the close in Johannesburg as almost eight stocks fell for every one that rose.
Any rebound may be short-lived as long as external factors weigh on the rand, said Piotr Matys, an emerging-markets currency strategist at Rabobank. A further decline may force the central bank to raise interest rates at the next policy meeting on Jan. 28 even as growth slows, he said.
“There are some warning signals that the rally in dollar-rand is somewhat stretched if you look at momentum indicators,” Matys said by phone from London. “But even if we see a correction, it seems that unless we witness signs of stabilization in China, a sustainable retracement is an unlikely scenario.”
Forward-rate agreements starting after the Jan. 28 policy meeting rose 3 basis points to 6.97 percent, or 34 points above the benchmark three-month Johannesburg Interbank Agreed Rate.