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Rand under pressure as Fed taper talk gains momentum

The currency has fallen more than 23% this year.

South Africa‘s rand weakened by more than 0.5 percent against the dollar on Thursday, with scope for further losses as speculation of an imminent tapering of stimulus by the U.S. central bank gains momentum, weighing on emerging markets.

The rand traded at 10.4455 against the dollar by 1623 GMT, having ended the New York session on Wednesday at 10.3890.

The currency has fallen more than 23 percent against the dollar this year as investors, betting that the United States will soon start scaling back its $85 billion a month asset purchases, dump riskier emerging markets.

“Basically tapering fears are spooking the currency and there’s been investment houses and currency predictors out there saying we’re going to see the rand at 11.0000 next year,” said Ion de Vleeschauwer, chief dealer at Bidvest Bank.

With domestic interest rates currently at four-decade lows, traders and analysts say the rand no longer holds quite the same “high yield” appeal that has traditionally attracted investors to emerging markets.

“There’s nothing really, locally, to entice people to invest here. We need higher interest rates before the rand can stage a proper recovery,” de Vleeschauwer said.

Two of the rand’s main sources of fragility are South Africa‘s yawning deficits on its current account and national budget which stand at nearly 7 percent of GDP and more than 5 percent of GDP respectively.

This has earned it a place among the so-called “fragile five” currencies, including those of India, Turkey, Indonesia and Brazil, which analysts say are most vulnerable to bouts of global risk aversion.

On the fixed-income market on Thursday, government bonds were mixed, with the yield on the 2026 benchmark ending flat at 8.235 percent while the 2015 paper was down 2.5 basis points at 6.115 percent.

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Stephen Katzenellenbogen

Stephen Katzenellenbogen

NFB Private Wealth Management
Moneyweb Click an Advisor
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Moneyweb Investor Issue 24

The relative strength of the rand has seen South Africans relax since the cabinet reshuffle and sovereign downgrades by S&P and Fitch. Don't be deceived - this is a self-inflicted wound. In the May issue of The Moneyweb Investor, we take a closer look to see which companies are likely to thrive and which will not, in the post-downgrade world.

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