Rand falls 2%, leading emerging assets down
The South African rand fell almost two percent yesterday, leading emerging currency losses as the ruling party’s efforts to remove President Jacob Zuma failed and the dollar firmed after a two-day slide. Most other emerging assets also slipped, with the exception of the yuan, which rose to one-week highs thanks to dollar-buying by state-run banks and reports of fresh capital curbs.
Emerging stocks slipped 0.3 percent after hitting two-week highs, as Asian markets reacted to Monday’s weak Wall Street close and doubts that the upcoming OPEC oil producers’ meeting will be able to implement an output cut. Markets will likely focus on South Africa, which dodged relegation to a junk credit rating last week but faces another test from S&P this Friday. The rand reversed some of Monday’s 3 percent gains against the dollar after a newspaper reported that scandal-tinged President Jacob Zuma had survived a ruling party vote to oust him. Bond yields rose five basis points off two-week lows.
Markets were awaiting a 1200 GMT press briefing by the ruling ANC party. Credit Agricole strategist Guillaume Tresca predicted more rand weakness after the past week’s 7 percent gain, and expects S&P to cut South Africa’s credit rating. He noted the agency had downgraded state-run utility Eskom last week. “Usually they are more negative than the other ratings agencies regarding South Africa ... When you read all the statements from S&P regarding South Africa they always mention the indebtedness of the public companies,” Tresca said.
He said politics too would remain messy. “The feud between Zuma and (finance minister Pravin) Gordhan is not over. The market is maybe too complacent and too optimistic.” Other emerging currencies also eased against the dollar, with the rouble down 0.4 percent and the Malaysian ringgit hovering near 14month lows on the back of a 1 percent decline in oil prices. However, the Chinese yuan rose to one-week highs as state-run banks stepped in to buy the currency for the second straight day and sources said the country’s forex regulator would step up measures to stem capital outflows through tighter vetting of outbound investment deals. Offshoretraded yuan also slipped after hitting record lows last week.
Mainland China blue-chip stocks rose to 11-month highs, taking heart from Monday’s data hinting at stronger manufacturing and corporate earnings. However, capital outflows via both legal and illegal channels are increasing pressure on the yuan, which has depreciated nearly 6 percent against the dollar this year. Yuan weakness raises the spectre of more capital flight and Societe Generale analysts noted that the domestic money stock was still growing faster than nominal GDP and valuations for local assets such as property and stocks looked stretched.
“It is going to be an uphill battle for the PBoC to retain control over the speed of currency adjustments,” SocGen said, predicting the yuan would trade at 7.30 per dollar by end-2017, revising the previous 7.20 forecast. — Reuters