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Rand rout: Mine unrest not to blame

Cape Town - The ongoing labour turmoil in the mining sector and perceived unreasonable wage demands from unions have increasingly been blamed for the slump in the local currency in recent weeks.

However, the rand's rout is much more a global story than merely a specific South African one, Brad Preston, portfolio manager of Mergence Investment Managers said on Wednesday.

"Comparing the rand to the Australian dollar shows that the near term weakness in the rand was much more of a global story.
 
"Over the month to May 27 the Aussie dollar had weakened to about 7.8% against the US dollar while the rand had weakened 7.1%."
 
He said other commodity currencies have also weakened against the US dollar, albeit not as much as the rand and the Aussie dollar: the New Zealand dollar, Brazilian real, Canadian dollar and Chilean peso are all between 3% and 6% weaker when compared to the US dollar month to date.

Preston pointed out that while the announcement of weak GDP data on Tuesday finally pushed the rand weaker than the Australian dollar for the month, the data suggested that at least the recent weakness in the rand could be attributable more to dollar strength and a weakness in commodity currencies globally, rather than primarily South Africa specific news and sentiment.





Meanwhile, the rand continued to lose ground against the dollar on Wednesday on a number of pressure factors, the big one being the GDP shock of Tuesday.

Expectations

Statistics SA on Tuesday announced that South Africa’s real gross domestic product increased by 0.9% in the first quarter of 2013, lower than the 2.1% achieved in the fourth quarter of 2012; but when compared with the first quarter of 2012, the GDP increased by 1.9%.

This, together with poor investor sentiment and expectations that the US Federal Reserve will scale back quantitative easing pounded the rand to a fresh 4-year low against the dollar.

The rand lifted its head somewhat to trade at R9.79/$ by 14:00 after falling to R9.86 in early morning trade.

Analysts indicated that the rand's fall through R9.80 opens up the door for a fall all the way through R10/$, Reuters reported.

“The big thing was the GDP numbers yesterday which were a shocker and turned the market significantly because they will have a big effect on our trade balance. It might also force Gill Marcus’s hand and press her into a rate cut‚” said Tony van Dyk‚ a currency dealer at the Iquad Group.

Dollar strength

Meanwhile, Nomura emerging markets expert Peter Attard Montalto said in a research note last week that the risk events for the second quarter have only begun to develop, "so we still see medium-run upside risks to the rand-dollar from here".

He said a combination of labour unrest and dollar strength are equally to be blame for the weakness in the rand.

Referring to the union rivalry in the mining sector, Montalto said this theme has much further to run and further to deteriorate, a factor that would impact the local currency negatively.

“If we do not resolve our labour relations challenges we will be losers. We will see deteriorating confidence, job losses and business failures,"
Finance Minister Pravin Gordhan had warned earlier.

He told Parliament that South Africa was at a cross-roads over renewed labour unrest in the mining sector.
 
He said something needed to be done or the country would lose jobs and investor confidence and companies would close.

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