Rand falls as US bonds pounded

The rand fell on Monday to its lowest level against the dollar since the middle of January as inflationary concern pummelled US bonds, with the dollar firming in response. The rand fell to R12.2857 to the dollar in morning trade, before recovering marginally in evening trade. The euro was at $1.2238 from $1.2275 before.

The rand fell on Monday to its lowest level against the dollar since mid-January as concern for spiking US bond yields and the dollar firmed in response.

The South African currency fell to R12.2857 to the dollar in morning trade, before recovering marginally in evening trade. The euro was at $1.2238 from $1.2275 before.

The rand’s fall was in tandem with that of other emergingmarket currencies, including the Russian rouble and Turkish lira, which weakened due to the stronger greenback.

The catalyst for the rand’s weakness was a sharp spike in the yields of the US 10-year treasury.

Despite the US Federal Reserve raising interest rates to 1.5% since December 2015, yields on the 10-year have remained relatively muted. That changed on Monday when yields rose to 2.9962%, amid surging oil prices. Brent crude briefly rose to $74 a barrel, its best level in three years.

TreasuryOne analyst Andre Botha said the increase in oil prices sent a bit of a shudder through the market as it increased the possibility of inflation going higher.

“This has sent the US treasury yields close to 3% and will place some pressure on the Fed when they have their next meeting on interest rates,” he said.

Nedbank analysts expect the rand to weaken in coming months. “Our 12-month targets range between R12.40/$ and R13/$,” they said.

US equities have performed relatively well of late amid upbeat company results, despite the Fed’s tightening.

Rising bond yields had important consequences for equities because higher interest rates meant higher borrowing costs for corporates, said FXTM analyst Hussein Sayed.

“Another sharp spike would eat away a significant element of their profitability by increasing interest expense.”

Many consumers would find their disposable income falling, as they would be paying more for their mortgages.

“So unless the growth in the economy, wages and companies’ profitability offsets the rise in interest rates, there may be bad times ahead, especially for equities,” Sayed said.

AN ANALYST SAID THE INCREASE IN OIL PRICES HAD SENT A BIT OF A SHUDDER THROUGH THE MARKET