Publications
Partners
Johannesburg - The rand slumped the most in five years, leading global currency declines against the dollar as a global bond selloff worsened amid concern that spending by the Donald Trump administration will fuel inflation.
The rand fell as much as 5% and traded 4.7% weaker at 14.1134 per dollar by 18:04 on Thursday, the biggest plunge on a closing basis since September 2011 and the most among 31 emerging-market and developed-nation currencies. The rand fell the most in eight years against the British pound, while government bond yields rose to two-month highs.
A global selloff on Wednesday wiped $337bn off the value of securities in an index of global bonds as Trump’s election to the US presidency sparked speculation that his spending plans would lead to a surge in inflation, prompting the Federal Reserve to raise interest rates. A Bloomberg gauge of the US currency climbed for a second day as benchmark Treasury 10-year yields exceeded 2% for the first time since January.
‘Relentless’ weakness
“There’s generalised risk-off sentiment,” said Mohammed Nalla, head of strategic research at Nedbank in Johannesburg. “The weakness started around 10:30 this morning and has been relentless. The rand is always a high-beta trade on the global risk-on, risk-off.”
South African government bonds fell a second day, with yields on the benchmark 10-year rand-denominated securities up 20 basis points to 9.03%, the highest since August 31. The decline in bonds globally saw Bank of America Merrill Lynch’s Global Broad Market Index drop by about 0.7% on Wednesday.
“The market is pricing in a higher probability that the Fed may accelerate the pace of tightening on the back of fiscal stimulus Trump intends to unleash on the US economy,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. “The path of Fed’s tightening cycle seems to be more uncertain with Trump at the helm.”
The rand slumped 5.3% against the pound, the most since October 2008, and weakened 4.2% versus the euro. South Africa is particularly susceptible to a US rate increase that would attract more investment to the dollar, as it relies on portfolio inflows to plug a current-account deficit forecast at 3.9% of gross domestic product this year.
The rand shot up from R13.37 at 12:30 on Thursday to R14.16 at 23:30, losing nearly 80c in 11 hours. (Graph: Bloomberg)
Trump, the 70-year-old real estate magnate, has pledged to cut taxes and boost spending on infrastructure by as much as $500bn. His proposals would increase the nation’s debt by $5.3trn, the non-partisan Committee for a Responsible Federal Budget estimated. The government’s marketable debt has more than doubled under President Barack Obama, to a record of almost $14trn.
Quickening inflation means Fed policy makers may act more swiftly to raise interest rates after holding off since increasing them from near zero in December 2015. As of November 9, there was an 82% chance they will move at their December 13-14 meeting, up from 76% at the end of last week, according to data compiled by Bloomberg based on futures.
