Rand Slumps as Gordhan Breaks Silence on Talk of Arrest, Firingby
Emerging-market currencies drop as dollar strengthens
CPI, retail sales ease, reducing SARB rate-increase pressure
The rand weakened as much as 2.2 percent against the dollar and bonds fell as concern intensified around the role of South African Finance Minister Pravin Gordhan, who broke his silence over reports that he may be arrested and dismissed.
By 4:47 p.m. in Johannesburg, the rand was 1.3 percent lower at 15.7540, the weakest since March 16 and the worst performance among 31 major and developing nation currencies tracked by Bloomberg after the Brazilian real. Yields on benchmark government rand bonds due December 2026 climbed 10 basis points to 9.48 percent, the highest since Jan. 28.
Gordhan may be charged with espionage and fired following a police investigation of his alleged involvement in a special investigations agency within the national revenue service, the Johannesburg-based Sunday Times reported. In a statement late Tuesday, Gordhan said the reports were “extremely distressing” and that he “would never have thought that individuals within the very agencies of this government would now conspire to intimidate and harass” him and his family.
“All that political uncertainty is definitely still playing on the rand,” said Wichard Cilliers, a trader at Treasuryone in Pretoria. “That’s the main reason why the rand is struggling and weaker than its emerging market peers.”
The MSCI Emerging Markets Currency Index fell 0.6 percent as the dollar strengthened on prospects for a U.S. interest-rate increase. The rand’s one-week implied volatility rose to the highest since Jan. 11 and the most among its developing nation peers.
Inflows into South Africa’s bond market have halted, removing a cushion that has previously supported the currency. Foreign investors sold a net 2.6 billion rand ($165 million) of bonds Tuesday, the biggest outflow since Jan. 19, data from the Johannesburg Stock Exchange showed. Foreigners have been net sellers of 48 billion rand of stocks so far this year, compared with the 16.9 billion rand they bought in a similar period in 2015.
Inflation slowed for a second consecutive month in April, Statistics South Africa said Wednesday, leaving room for the central bank to delay more rate increases that would support the rand, Cilliers said. Retail sales for March were the lowest since May 2015, the statistics agency also reported Wednesday, adding to concerns that consumer demand is weakening as growth slows in Africa’s most industrialized economy.
The central bank announces its latest decision on interest rates on Thursday, with only six of 25 economists in a Bloomberg survey expecting a third increase by the Monetary Policy Committee this year.
“Lower-than-expected inflation and retail sales will probably lead the South African Reserve Bank to leave rates on hold at its meeting tomorrow,” John Ashbourne, Africa economist at Capital Economics, said in a note. Recent weakness in the rand is a risk to this outlook, he said. “The Reserve Bank will be forced to raise rates later this year, but today’s figures should allow the MPC to pause, giving the weak economy a breather.”
The central bank expects the economy will expand by less than 1 percent this year, the slowest pace since a recession in 2009. The return of political tensions comes two weeks before S&P Global Ratings is due to publish its assessment of South Africa’s BBB- credit rating. The company sees sluggish growth as a key risk to the rating. A Bloomberg survey this month showed 12 of 13 economists expect S&P to cut South Africa to non-investment grade by year-end.
“All those bad factors prevailing two months ago that everybody forgot about, all those factors are back now again,” Cilliers said. “That’s why the rand is back where it was two months ago.”