Rand closes in on R10/$ amid sell-off of SA bonds

Poor GDP numbers and reversal in global sentiment hit currency

DISAPPOINTING growth figures and fears of violent labour unrest in SA’s mining sector pushed the rand to a new four-year low yesterday, as foreign selling of local bonds reignited concerns over the currency.

The negative sentiment spilt over onto the JSE. Stocks fell sharply and led to losses across the board, with the top 40 index down 1.89% to 36,739.42, and the all share falling 1.76% to 41,233.07.

The local currency has fallen more than 15% this year, coming within range of the psychological R10/$ mark, and touching a low of R9,85 during the day yesterday.

The market was still reeling from the previous day’s data, which showed growth slowed more than expected in the first quarter of the year as manufacturing output shrank nearly 8%.

“The GDP (gross domestic product) numbers yesterday were a shocker and turned the market significantly because they will have a big effect on our trade balance,” said Iquad Group currency dealer Tony van Dyk.

Slower growth may curb tax revenue and make it harder for the government to rein in its budget deficit, a concern raised by Moody’s and other rating companies when downgrading SA in the past eight months.

SA’s current-account gap of 6.5% of GDP in the fourth quarter is the fourth-biggest of about 60 countries tracked by Bloomberg.

“The weakness in the rand has been due in large part to domestic factors,” said Capital Economics analyst Shilan Shah.

The relationship between rand movements and global risk appetite had broken down of late, Mr Shah noted.

While the 9%-plus fall over the past month had left the rand undervalued, it was likely to remain weak.

Underlying the currency’s weakness has been a sustained foreign investor sell-off of local bonds. Foreigners were net sellers of R501m of local bonds excluding repo transactions after net sales of R1.226bn of local bonds on Monday. In the year to date, foreigners have been net buyers of R27.756bn of local bonds‚ excluding repo transactions. By contrast, last year foreigners bought a net R93.515bn of local bonds‚ excluding repo transactions.

“There was some anticipation when the Japanese started the quantitative easing programme that we would see a lot of that money so we saw the rand appreciate and bond yields fall to new lows, but then it didn’t happen that way,” said Nedbank chief economist Dennis Dykes.

Slow growth in developed economies after the 2008 financial crisis, compared to high growth in emerging economies, had seen high-yield currencies such as the rand become the darling of international

investors. But the recent shift in global sentiment had changed that. “Emerging markets are disappointing in comparison to their developed counterparts, and weaker than expected growth out of India and China has resulted in a sell-off in emerging market currencies,” said Mr Dykes. “This has been particularly true if you are a commodity producer and directly benefit from the Chinese growth story.”

Increased dollar strength in the past few weeks and expectation that the Federal Reserve might start pulling back on its bond-buying programme, which would help the dollar’s value, have played havoc with other commodity-based currencies. The Australian dollar has shed about 8% this month, putting it on track to become the world’s worst-perform- ing major currency, and the New Zealand dollar is within sight of a seven-month low. Although the selloff in the rand can be attributed in part to a change in global conditions, local factors such as a growing current account deficit, low growth and fears over unrest have made the unit particularly vulnerable to sudden changes in investor sentiment.

SA’s poor growth outlook might also force Reserve Bank governor Gill Marcus into a rate cut‚ “even though she won’t want to with the rand as weak as it is,” said Mr van Dyk. With Reuters, Bloomberg