Rand Pares Worst Quarterly Streak in 12 Years; Yields Decline

The rand strengthened, paring its longest quarterly losing streak in almost 12 years, after the U.S. economy expanded at a slower pace than forecast in the first quarter, spurring demand for higher-yielding assets.

The rand gained after South African Reserve Bank Governor Gill Marcus said price stability remains the central bank’s mandate and that the country has little room for fiscal and monetary policy support. Emerging-market bonds, stocks and currencies fell as the Federal Reserve said last week it may taper monetary stimulus. Gross domestic product in the world’s biggest economy rose a revised 1.8 percent from January through March, down from a prior estimate of 2.4 percent.

“The market interprets” the U.S. growth data as a signal that the “Fed won’t scale back quantitative easing aggressively,” Edwin Smit, a derivatives trader at EDI (Pty) Ltd., said in an e-mailed response to questions.

The rand appreciated as much as 0.8 percent to 10.0227 per dollar and was trading 0.5 percent stronger at 10.0568 as of 4 p.m. in Johannesburg. The currency has lost 8 percent over the past three months, heading for its fifth quarterly fall in the worst stretch of declines since the final three month of 2001. Yields on 10.5 percent government bonds due December 2026 fell for a second day, declining 10 basis points, or 0.10 percentage point, to 8.13 percent.

‘Tolerate Inflation’

South Africa’s central bank won’t necessarily raise interest rates to ward off rising inflationary pressures because economic growth remains weak, Marcus said in a speech in Johannesburg. Forward-rate agreements, used to speculate on interest rate movements, are pricing in a 60 percent chance of an increase compared with a more than 80 percent probability before Marcus started speaking, according to Bloomberg calculations.

“The downside risks to the growth outlook would suggest we should tolerate inflation at these levels,” Marcus said. While upside risks to the inflation outlook make interest-rate reductions more difficult they “do not automatically imply a tightening of the monetary policy stance. The downside risks to growth imply that we would not want to be unnecessarily preemptive.”

The Reserve Bank held the repurchase rate at 5 percent last month and cut its economic growth forecast for this year to 2.4 percent from 2.7 percent.

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