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Rand sinks most since 2011 as commodities tumble

Singapore - The rand tumbled the most since 2011 on concern the plunge in commodity prices will deepen as China’s economy slows.

The currency led declines in emerging-market exchange rates, hurt by lower prices for resources that account for more than half of its exports. Losses have been exacerbated by concern over growth in China, the top destination for South Africa’s raw materials, and the prospect of higher US interest rates.

The rand is among the “commodity-linked, high-yielding currencies where a lot of foreign funds were parked,” said Nizam Idris, Singapore-based head of foreign-exchange and fixed- income strategy at Macquarie Bank.

“A lot of these flows are being reversed right now. Lower Chinese growth means weaker demand for commodities as they are the world’s largest consumer of raw materials by far.”

The rand weakened 3.3% to R13.41/$ a dollar as of 06:20 in South Africa, the most since September 2011, data compiled by Bloomberg show. It fell to R14.07 earlier, the lowest on record, and has dropped 14% this year.

China’s surprise devaluation of the yuan on August 11 has roiled global markets and reinforced concern of a steep slowdown in the world’s second-largest economy. The Bloomberg Commodity Index, which tracks 22 raw materials, slumped to its lowest level since 1999 on Monday.

Investors will see the rand’s fall “in the context of other commodity currencies because it’s not just the rand that’s weak,” Ndzutha Mngqibisa, foreign-exchange and fixed-income strategist at Barclays’ South African unit, said by phone from Johannesburg. “Other commodity-based currencies, emerging- market currencies, they’re all weak, so it’s not a rand isolated event.”

Devaluations by Vietnam and Kazakhstan are adding more pressure on central banks from South Africa to Kenya, which have taken aggressive action this year to bolster their currencies.

‘Vicious cycle’

A rebound could be in the offing as the rand’s slump has pushed its 14-day relative-strength index above the level that indicates it’s oversold. The RSI climbed to 81 on Monday, the highest since May 2013 and above the 70 level that some traders see as a sign the currency has depreciated too much, too fast.

Even so, the slide underlines the challenges faced by President Jacob Zuma’s administration in reigniting investment and growth in an economy running an electricity shortage and persistent fiscal and current-account deficits.

South Africa faces more than 60 000 job losses this year in industries ranging from mining to aviation, according to a report by the Solidarity labour union.

“It’s a vicious cycle for commodity-related currencies like the rand as weak commodity prices would feed into weak jobs market, weighing on the economy,” said Tarsicio Tong, a currency trader at Union Bank of Taiwan in Taipei.

“It’s hard to see any strong rebound for now.”

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