- Strong demand at Eurobond sale even as credit downgrade looms
- Golden cross suggests further gains may be in store for rand
South Africa’s rand advanced for a second day, reaching a four-month high against the dollar, as a successful Eurobond sale and a corporate takeover offer boosted confidence in Africa’s most industrialized economy.
The rand gained as much as 2.4 percent percent to 14.6280 per dollar, the highest on a closing basis since Dec. 8, and was at 14.7280 by 5:51 p.m. in Johannesburg. Yields on benchmark government rand bonds due December 2026 fell 6 basis points to 9.14 percent, the lowest level on a closing basis since April 1.
South Africa returned to international debt markets last week after an absence of two years, attracting offers for more than twice the $1.25 billion of bonds on sale. The sale shows investor confidence is returning, even as the nation faces a credit downgrade to junk and its president fights for political survival amid a corruption scandal.
“It does seem as though investor sentiment is slightly better toward South Africa than it was a couple of weeks ago, given the strong demand” for the Eurobonds, Jana van Deventer, an economist at Johannesburg-based ETM Analytics, said by phone.
The rand’s 50-day moving average against the dollar fell below the 100-day average on Friday, a so-called golden cross that suggests to some traders that further gains are in store.
President Jacob Zuma survived an opposition-party impeachment call in Parliament last week following allegations that his close friends, the Gupta family, had influenced cabinet appointments. Zuma plunged the nation in turmoil and roiled markets when he fired Finance Minister Nhlanhla Nene in December and replaced him with a little-known lawmaker, raising concern about his commitment to fiscal targets.
While the rand recovered some losses after Zuma backtracked and re-appointed Pravin Gordhan to the finance ministry position that he had held from 2009 to 2014, Standard & Poor’s said last week that policy uncertainty and slowing growth are putting pressure on the country’s credit rating. S&P rates South Africa’s debt BBB- with a negative outlook, and is set to review the assessment in June.
Even so, the Eurobond sale and other investments show that investor confidence is improving, said John Cairns, a currency strategist at Rand Merchant Bank in Johannesburg. Associated British Foods Plc on Friday offered 5.6 billion rand ($380 million) to buy the 49 percent it doesn’t already own in Illovo Sugar Ltd.
Investor demand for the Eurobonds “shows ongoing confidence towards the country, despite a looming rating downgrade,” Cairns said in an e-mailed note. The Illovo offer “is certainly a positive; the deal will probably be approved at the Illovo shareholder meeting in May, followed in turn by inflows,” he said.
Emerging-market currencies and stocks rose for a third day on Monday as Chinese inflation data spearheaded an advance in the nation’s equities and a gauge of the dollar extended losses. The first monthly increase in China’s factory gate prices since 2013 added to signs of an improving economy and raised prospects the People’s Bank of China will leave rates unchanged for a longer period as a threat of deflation wanes. China is the biggest buyer of South African raw materials.
“There is potential for the rand to stage a better performance in 2016,” Van Deventer said. “It does seem as though the tide has turned for the local unit, despite the fact that there are still various risk factors.”