Rand Slumps to 4-Year Low as Central Bank Leaves Rate Unchanged
The rand declined for a second day, reaching the weakest level in almost four years, after the central bank left its benchmark repo rate unchanged and said the currency’s decline may benefit exporters. Bond yields rose.
The rand declined as much as 0.3 percent to 9.0878 per dollar, the weakest since April 2009. It traded 0.1 percent down as of 4:22 p.m. in Johannesburg, bringing its decline this year to 6.6 percent, the most out of 25 emerging-market currencies monitored by Bloomberg. Yields on benchmark 10.5 percent bonds due December 2026 climbed four basis points, or 0.04 percentage point, to 7.37, the highest since Jan. 4.
The weak rand and above-inflation wage increases posed risks to the outlook for prices, Governor Gill Marcus said after the rate-setting committee left the Reserve Bank’s repo rate at 5 percent. The rand’s decline, while a “concern”, would benefit the nation’s exporters and help narrow the current- account deficit, she added, fueling speculation the bank won’t intervene to support the currency.
“There is little doubt, with the emphasis on the wage- price spiral and the rand, that inflation risks are now thought of differently,” Razia Khan, the London-based head of Africa research at Standard Chartered Plc, said in e-mailed comments. “Mention was also made of the benefits of a weaker currency. The message? Rand weakness may not be an unequivocal negative.”
While developing countries including Poland, Mexico and Malaysia sold dollars to support their exchange rates, South Africa’s central bank hasn’t intervened to influence the currency. The central bank doesn’t target a level for the rand and intervention would be costly and ineffective, Marcus said Oct. 10.
South Africa’s currency slumped 2.3 percent yesterday after the International Monetary Fund lowered its forecast for economic growth in the country to 2.8 percent for this year, below projections by the government.
The currency’s decline in itself doesn’t pose a risk to the nation’s credit rating, said Konrad Reuss, head of Sub-Saharan Africa for Standard & Poor’s, which cut South Africa’s rating one level to BBB, with a negative outlook, in October.
“Unless we see unorthodox policy responses, in that we the Reserve Bank change gear and start trying to manage the exchange rate more actively,” the recent decline is not a concern, Reuss said in an interview in Cape Town. “You have a floating exchange rate which is good in the context of the current account deficit. As long as we see credible policy responses to that it wouldn’t be a rating concern at this stage.”
Growth in Africa’s biggest economy slowed last year as a series of strikes in the mining industry cut output and a slump in Europe reduced export demand. The government is forecasting growth of 3 percent this year, while the central bank predicts 2.6 percent.
The rand may extend declines in coming months, according to Credit Suisse Group AG, which yesterday adjusted its estimate for the rand to 9.30 per dollar in the next three months, from a previous estimate of 9.10.
The currency “has been hit by a loss of confidence amongst international investors regarding the outlook for South Africa,” Bernd Berg, a Zurich-based emerging-markets strategist at Credit Suisse, said in an e-mailed response to questions. “Strikes, a steep fall in exports, political uncertainty, falling growth rates and rising inflation” are among factors weighing on the currency, he said.
The rand’s three-month implied volatility jumped 35 basis points today to 13.50 percent, the highest in more than two weeks, indicating that options traders see wider price swings in the currency in coming weeks.
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