Rand Leads Emerging-Market Gains Against Dollar on Stimulus Bets

  • Recent data suggest South African economy may be over worst
  • Currency strengthens against pound, euro; bonds climb

South Africa’s rand strengthened to a seven-week high against the dollar as prospects for stimulus in major economies boosted demand for riskier assets and local data suggested the economy may have turned the corner.

The currency gained as much as 2 percent to 14.1784, the strongest since Nov. 25 on a closing basis, and was 1.7 percent higher at 14.2346 by 5:37 p.m. in Johannesburg, leading gains among 24 emerging-market currencies tracked by Bloomberg. The rand rose 0.2 percent against the pound and 1.5 percent against the euro, set for the strongest closing level since Dec. 7.

Speculation that central banks will boost stimulus after the U.K vote to leave the European Union has added more than $4 trillion to the value of equities worldwide since June 27. The Bank of England on Thursday signaled it’s readying measures to boost the economy for August as it kept its benchmark interest rate at a record low. A key adviser to Prime Minister Shinzo Abe said former Fed Chairman Ben Bernanke had floated the idea of perpetual bonds to stimulate Japan’s economy. Investors see about a 5 percent probability of a rate increase at the Federal Reserve’s July meeting.

“You’ve got rather dovish expectations around the Fed; you’ve also got quite lofty expectations in the market around central bank intervention from the BOE today and also fairly lofty expectations around the BOJ,” Mohammed Nalla, head of strategic research at Nedbank in Johannesburg, said by phone before the Bank of England’s decision. “Everyone assumes that if the central banks are going to be priming the pump, so to speak, that’s going to entrench this global search for yield.”

Low Point

The South African economy’s contraction in the first quarter may have been the low point for the year. Consumer spending in May increased more than economists forecast, figures released Wednesday showed, while a reading of factory production on Tuesday showed the best performance in 10 months. Mining data on Thursday showed production increased 2.5 percent in May from a month earlier, beating estimates.

“The mining sector is heading for a small recovery in the second quarter when compared to the first quarter of 2016, which would help the overall economy to narrowly avoid a technical recession, in line with our baseline view,” Hanns Spangenberg , a senior economist at NKC African Economics, said in a note.

Johannesburg’s benchmark stock index was little changed, after earlier advancing as much as 0.4 percent. Yields on benchmark South African bonds dropped 5 basis points to 8.67 percent, after being as low as 8.62 percent.

“The market’s expectation around central banks is exceptionally dovish and as a result, we could be susceptible to a little bit of disappointment in the event that central banks don’t deliver as much as the market’s currently pricing in,” Nedbank’s Nalla said.

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