The rand’s longest run of quarterly losses on record risks extending into year-end, fanning inflationary pressures at a time when rising interest rates threaten to derail the South African recovery.
The currency posted its 10th straight quarterly drop against the dollar in the three months through September, the longest stretch since at least 1971, when Bloomberg began compiling the data. Last month, options traders became the most bearish on the rand since February, signaling deeper declines may be in store. South African bonds posted the worst returns in emerging markets after Brazil and Turkey in the period.
With the rand’s slide pushing the South African central bank to continue with a series of rate increases, higher borrowing costs are weighing on an economy already beset by slowing global commodity prices and the aftermath of labor strikes at home. Investec Ltd. lowered its forecast for the currency this week, saying the likelihood of “meaningful rand weakness” had increased.
“The dollar is giving everyone a hiding at the moment, but it’s not only a dollar story,” Abri du Plessis, who helps manage about $400 million at Gryphon Asset Management Ltd., said by phone from Cape Town yesterday. “Our economic fundamentals are not a good story and I can’t see the commodity cycle turning. We’re probably going to see more rand weakness.”
The currency retreated to its weakest level since January, closing in on the lowest since October 2008, after South Africa’s trade deficit widened more than economists’ estimates in August. The shortfall climbed to 16.3 billion rand ($1.4 billion) from 6.8 billion rand and more than the 8.7 billion- rand median estimate of 14 economists in a Bloomberg survey.
The rand declined 0.3 percent to 11.3076 per dollar by 6 p.m. yesterday in Johannesburg. Yields on government bonds due December 2026 rose two basis points to 8.33 percent.
A slide in the Bloomberg Commodity Index last month to a five-year low is weighing on the South African currency. Raw materials accounted for 60 percent of exports in 2013, with China the biggest buyer of coal, iron ore and other mining commodities.
The Asian nation’s economy, the world’s second-largest, will grow 7.3 percent this year, according to the median forecast by analysts in a Bloomberg survey. That would be the slowest pace in more than two decades and compares with the government’s target of 7.5 percent.
“Should China experience further slowdown, the rand will likely weaken as commodity prices ease once again,” Annabel Bishop, the Johannesburg-based chief economist at Investec, said in a report dated Sept. 29.
Investec revised its year-end forecast for the rand to 10.92 per dollar, compared with a previous forecast of 10, and said there is a 45 percent probability of a “down-case scenario” that could see the currency depreciate to 11.70 this year and 12.70 by the end of 2015.
With the National Treasury predicting growth of 1.7 percent this year, higher Federal Reserve rates would reduce the rand’s yield advantage over the dollar. The Reserve Bank left its benchmark unchanged at 5.75 percent on Sept. 18 to support the ailing economy after raising it by 75 basis points earlier this year. That compares with a U.S. benchmark of zero to 0.25 percent.
The difference in the premium on options contracts to sell the rand over the next three months versus those to buy them, known as the risk reversal, climbed to 3.33 percentage points on Sept. 16, the most since Feb. 5, indicating that traders see a higher risk of currency depreciation. The gauge jumped 26 basis points yesterday to 3.3 percent.
“Even with an end to the worst of the industrial unrest, South Africa’s problems are not over,” Razia Khan, a London- based Africa economist at Standard Chartered Plc, said in an e- mail yesterday. “There is no evidence of a hoped-for automatic correction in external metrics. The rand may have to adjust further.”
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