Increase in US interest rates will spell more trouble for rand

THERE may be little to stop the rand from sliding to an all-time low as the approach of higher US borrowing costs threatens to erode the Reserve Bank’s interest rate support.

The rand weakened to its worst level in 13 years as better-than-estimated US payrolls data last week boosted the dollar and there is now no key technical resistance level that would stop the rand from breaching the R13.84 per dollar record it reached in December 2001, according to Rand Merchant Bank.

Société Générale is advising clients to sell the rand against the greenback as the Federal Reserve moves closer to raising interest rates, reducing demand for assets in emerging markets.

“The guys are now pricing in a hike by the Fed (Federal Reserve) in June,” Mohammed Nalla, the head of strategic research at Nedbank Group, said on Tuesday.

“Until we can see some sort of credible reversal in the dollar strength, the rand is likely to remain under pressure.”

Policymakers in Africa’s second-largest economy have left rates unchanged since July while emerging market peers from Turkey to India cut borrowing costs.

The rand’s 4.1 percent slump against the dollar over the past five days is changing the out- look, with forward-rate agreements pricing in a 25 basis point increase in interest rates in May, compared with no change a month ago, according to data compiled by Bloomberg.

Investors’ expectations of inflation over five years in South Africa rose to the highest in two months this week with white maize prices having risen 29 percent in Johannesburg this year as a drought threatens crops and the global oil price increasing about 23 percent since reaching a five-year low on January 13.

Last month, Finance Minister Nhlanhla Nene raised income tax, increased fuel and electricity levies and backed higher tariffs for the state-owned power utility Eskom, which last year resumed managed blackouts to cope with an electricity shortage.

The outlook for consumer prices had “worsened” compared with a month ago, Elna Moolman, an economist at Macquarie Group, said.

She raised her 2015 average inflation forecast to 4.2 percent from just below 4 percent after the February Budget.

“There will be some inflation pressure from the weaker rand,” she said. The five-year break-even rate, the difference in yield between inflationlinked and fixed-rate debt, rose 22 basis points since the US jobs data on Friday to 5.71 percentage points. The Reserve Bank said on January 29 that inflation would probably average 3.8 percent this year.

The rand gained 0.2 percent to R12.3458 per dollar by 5.01pm yesterday, advancing the first time in five days and paring its slide this year to 6.3 percent.

“Movements against the emerging currencies like the rand are a little bit exaggerated,” Nigel Rendell, an analyst at Medley Global Advisors, said in an interview from London on Tuesday. – Bloomberg