The rand extended a slump after breaching R13/US$ for the first time since December as investors bet there’s little chance the nation’s central bank will follow emerging-market peers in raising interest rates. The currency was trading at R13.27/$ at 10.25am.
Turkey on Thursday became the latest emerging markets central bank to deliver a surprise rate increase as currencies sag. The South African Reserve Bank, which targets inflation and has often stated it won’t act to bolster the rand, left its benchmark rate unchanged last month. The worst quarterly economic contraction in nine years suggests it won’t tighten anytime soon, according to Brown Brothers Harriman & Co.
“Rand weakness reflects a broad re-pricing of emerging-market assets within a context of rising US interest rates,” said Win Thin, the firm’s global head of emerging-markets strategy. “This latest bout of rand weakness was triggered by the much weaker-than-expected first-quarter GDP report.”
The rand weakened 0.4% to R13.03/$ as of 7am in Johannesburg on Friday. The currency dropped as low as R13.05 on Thursday, its worst level since 15 December, days before Cyril Ramaphosa won the leadership of the ANC, putting him on course for the presidency. The currency’s decline worsened after the drop in Brazil’s real dampened sentiment toward risky assets, driving losses on a gauge that tracks emerging-market currencies to the most in more than a week.
With the Federal Reserve proceeding with policy tightening, and another interest-rate hike expected next week, emerging markets across the globe are bracing for a further selloff. Turkey joined Indonesia and India in raising rates. South Africa’s central bank’s policy is to let the currency float freely, and it didn’t take action during bouts of currency weakness in the past two decades.
The GDP report this week showed that South Africa’s economy shrank the most in nine years in the first quarter, casting a pall over Ramaphosa’s promise to boost growth. His rise to power since December initially boosted sentiment and the rand following Zuma’s scandal-ridden tenure, but confidence indexes have now returned to where they were late last year as businesses seek lasting change.
After standing pat on the main policy rates last month, the central bank hinted that further loosening was off the table as inflation pressures build. Money markets are pricing in only 12 basis points of tightening over the next 12 months.
“It is clear that the economy is in a fragile state and it may take some time before we see any evidence of a Ramaphosa effect,” said Natalie Rivett, a senior emerging markets analyst at Informa Global Markets in London.
The rand is down 2.9 percent this week, heading for the worst since the five days through to 18 May. The yield on government debt due 2026 climbed six basis points to 8.87%. Yields have climbed 26 basis points this week. — Reported by Colleen Goko and Robert Brand, with assistance from Ben Bartenstein, (c) 2018 Bloomberg LP