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Rand sinks most in 7 years as traders fret over China, liquidity

Jan 11 2016 06:50
Candice Zachariahs and Liau Y-Sing

Sydney - The rand plummeted by the most in more than seven years on Monday as the market turmoil in China and a drop in US stocks deterred risk-taking.

READ: Rand faces more manic Mondays as Japan currency romance unwinds

The rand plunged as much as 9%, the most since October 2008, before trading down 2.3% at 16.6832 a dollar as of 10:57 in Singapore. By 06:50 in South Africa, it was trading even lower at R16.72.

One-month implied volatility surged 3.93 percentage points to 23.83% after the Standard & Poor’s index of shares fell 6% last week in the biggest decline since 2011.

The rand’s decline on Monday probably came after “a combination of stops and margin calls caused mass capitulation” by Japanese retail investors, Gareth Berry, a foreign-exchange strategist at Macquarie Bank in Singapore, wrote in a research note. The

South African currency, which dropped 25% last year, has been hurt by a slump in commodity prices, lackluster economic growth and rising US interest rates.

“The huge spike in risk aversion last week, poor liquidity and position liquidation have hit the rand this morning,” said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking in Sydney.

Losses in the rand accelerated in December after President Jacob Zuma unexpectedly fired his finance minister only to alter the decision days later, while the tumultuous start to the year in China has further damaged sentiment.

READ: People overreacted to Nene’s sacking, says Zuma

South Africa sold 37% of its exports to China in 2014 and the two countries - along with Brazil, Russia and India - are part of the so-called Brics, a grouping of nations considered to show the growing influence of emerging economies.

China strengthened the yuan’s reference rate slightly for a second day on Monday after an eight-day run of reductions that sent shock waves through financial markets and escalated fears of a currency war.

Most Asian exchange rates were down on Monday although not to the same extent as the rand: South Korea’s won fell 0.9% and Malaysia’s ringgit weakened 0.4%.

“The recent market turmoil has pushed volumes up and made carry trades less attractive,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank in Singapore.

“I don’t think it was driven by any fundamental arguments,” he said, adding that the withdrawal of carry trades funded by Japan’s yen had helped weaken the rand.

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest. 24.com encourages commentary submitted via MyNews24. Contributions of 200 words or more will be considered for publication.

rand  |  currency  |  markets

 
 
 
 

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