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Rand rebounds as best emerging-market currency

Robert Brand

The rand has bounced back from a five-year low on expectations that the Reserve Bank will raise the repo rate as inflation grows.

The rand was the best performer among emerging-market currencies on Thursday. (Gallo)

The rand gained the most among emerging-market currencies on Thursday, rebounding from a five-year low on expectations the South African central bank will raise its key rate again as inflation accelerates.

Producer prices rose more than economists' expectations in December, data showed on Thursday after the South African Reserve Bank followed India and Turkey this week in unexpectedly lifting borrowing costs. South African bond yields rose to the highest in almost three years after the Federal Reserve trimmed monetary stimulus by $10-billion for a second month.

"Eventually, higher interest rates should play in the rand's favour," Ion de Vleeschauwer, chief dealer at Bidvest Bank, said by phone from Johannesburg. "But we're seeing slowing growth, and a selloff in the bond market, so the rand is caught between two fires. It's a nervous market out there; the trading range is going to be pretty wide."

The rand gained 0.7% to 11.24 per dollar by 3:36pm in Johannesburg after declining as much as 0.7% earlier to 11.39, the weakest level since October 2008. The yield on benchmark government bonds due December 2026 climbed eight basis points, or 0.08 percentage point, to 8.86%, the highest level on a closing basis since April 2011. The rate has climbed 60 basis points this year as foreign investors dumped a net R18.8-billion of South African debt, including R3.88-billion on Wednesday.

Data Dependent
Inflation will probably breach the 6% upper limit of the central bank's target range in the second quarter and remain above that level for an extended period, Reserve Bank Governor Gill Marcus said as the bank lifted its benchmark repurchase rate by 50 basis points to 5.5%. The move wasn't intended to support the rand, though the currency's decline would fuel inflation, she said.

Further monetary tightening would be "highly data dependent," Marcus said. The producer-price inflation rate rose 6.5% in December from 5.8% the previous month, more than the 6.1% median estimate of 13 economists in a Bloomberg survey, Statistics South Africa said.

"From what the governor said, it is clear that the Monetary Policy Committee is not ruling out further hikes," Bruce Donald, a currency strategist at Standard Bank Group in Johannesburg, said in an email. "Any move from the bank at its next few meetings will be up rather than down."

The Federal Open Market Committee said on Wednesday it will cut monthly bond purchases by $10-billion to $65-billion. A Purchasing Managers' Index in China, South Africa's biggest trading partner, fell to 49.5 from 50.5 in December, HSBC Holdings and Markit Economics said in a statement. A number below 50 indicates contraction.

Rand Volatility
"The rand remains very vulnerable, especially if you consider that the Fed continued to taper its asset purchases and that the current-account deficit remains wide," Theuns de Wet, head of global markets research at Rand Merchant Bank in Johannesburg, said in an emailed note to clients. "Rate hikes can only drive growth lower."

Private-sector credit growth slowed to 6.1% in December from 7% the previous month, according to central bank data. The median estimate of 14 economists in a Bloomberg survey was for growth of 6.7%.

The rand is trading below its fair value and the depreciation in emerging-market currencies is partly due to an overreaction by investors, Finance Minister Pravin Gordhan said. The South African currency "is behaving as one would expect of a floating currency, by adjusting to various market perceptions," he said in a speech in Johannesburg.

The rand's three-month implied volatility against the dollar was little-changed on Thursday after jumping 85 basis points on Wednesday to 17%, the highest since August and the most out of 24 emerging-market currencies monitored by Bloomberg. Rising volatility indicates that options trades see wider price swings in the currency in coming months. – Bloomberg

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