Rand extends slump to four-year low as GDP slows

The rand's slump revived speculation that the central bank will cut interest rates. (Gallo)

The rand's slump revived speculation that the central bank will cut interest rates. (Gallo)

The slump revived speculation that the central bank will cut interest rates.

Gross domestic product (GDP) growth eased to an annualised 0.9% in the three months through March, compared with 2.1% the previous quarter. The median estimate of 15 economists in a Bloomberg survey was 1.6%. Slowing growth could prompt the Reserve Bank to lower borrowing costs, eroding the rand's yield advantage over the dollar.

"The GDP data has been significantly worse than expected, supporting the broad picture of a stagnating economy," Bernd Berg, an emerging market strategist at Credit Suisse AG in Zurich, said in an email.
"The weak economic data will further intensify selling pressure on the rand."

South Africa's currency depreciated as much as 1.4% to 9.7465 per dollar, the weakest level since March 2009, according to data compiled by Bloomberg. It traded 1.3% weaker at 9.7307 as of 11:41am in Johannesburg, bringing its decline to 7.8% in May. Yields on benchmark 10.5% bonds due December 2026 climbed seven basis points, or 0.07 percentage point, to 7.16%.

The rand may extend its decline to 10 per dollar in coming weeks after breaching a significant resistance level at 9.7, Berg said. Resistance and support are levels where traders cluster orders to buy or sell a currency.

Strong incentive
The South African Reserve Bank has left its benchmark repurchase rate at 5% since a surprise cut in July. The central bank will probably hold rates unchanged this year before cutting by 50 basis points in the first quarter of 2014, according to Bruce Donald, a currency strategist at Standard Bank Group in Johannesburg.

"GDP numbers will impact the currency market largely via the implications for monetary policy," Donald said in emailed comments before the release of Tuesday's growth data. "Weak economic growth means that the incentive for the central bank to ease policy remains strong."

Forward-rate agreements starting in December dropped three basis points, or 0.03 percentage point, to 4.96%. The contracts are trading 17 basis points below the Johannesburg Interbank Agreed Rate, implying 34% probability of a 50 basis-point rate cut by year-end. – Bloomberg

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