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Rand's uncontrolled drop to cause further rate hikes - analysts

Jan 11 2016 11:53
Rene Vollgraaff, Candice Zachariahs and Liau Y-Sing

Johannesburg – The rand may again test the R17.50 level per dollar, while the currency's uncontrolled depreciation may cause the SA Reserve Bank (Sarb) to raise rates by 50 basis points, analysts said on Monday.

The rand’s crash to a new low against the dollar drove South African inflation expectations to the highest in at least three-and-a-half years and fuelled speculation that Sarb will act more aggressively at its policy meeting this month.

The five-year break-even rate, a measure of bond investors’ inflation expectations, rose 21 basis points to 7.45%  on Monday after the rand fell to R17.9169 per dollar in Asian trade. That compares with a six basis-point decline in the break-even rate for emerging-market peer Turkey.

Standard Bank’s Walter de Wet and Shireen Darmalingam said in an emailed note that South Africa’s current-account and budget deficits are likely to weigh on the currency, while any rallies in the unit will be short-lived as investors shun developing nations.

They said the rand’s uncontrolled depreciation may cause the Reserve Bank to raise rates by 50 basis points at its monetary policy committee (MPC) meeting later this month.

“It is hard to see the rand pull back on a sustainable basis,” the Standard Bank analysts said. “In recent weeks we have seen South Africa’s real effective exchange rate fall sharply to levels last seen in 2001 and 2008.

“We note that in both 2001 and 2008, amid a rand slide, the South African Reserve Bank embarked on a fairly aggressive rate hiking cycle.”

“A weaker currency implies a higher inflation profile,” Carmen Nel, an economist at Rand Merchant Bank unit, said by phone from Cape Town on Monday. “You cannot rule out the risk of an interest-rate hike of as much a 50 basis points in January.”

The last time Sarb adjusted interest rates by more than 25 basis points was in January 2014, when it raised borrowing costs by 50 basis points. Since then, the bank has limited moves to quarter-point increases at three meetings, the most recent in November 2015 when the repurchase rate was boosted to 6.25%.

Reserve Bank governor Lesetja Kganyago has forecast inflation will breach the 3% to 6% target range in the first and fourth quarters of this year. Inflation accelerated to 4.8% in November.

Traders have increased bets that Sarb will raise rates by more than 25 basis points at the next MPC meeting on January 27-28. Forward-rate agreements starting in one month, used to speculate on borrowing costs, show investors are pricing in about 40 basis points of rate hikes compared with 27 basis points on Friday.

The rand was 1.6% weaker at R16.5604 per dollar as of 11:10 in Johannesburg.

Rand plummets by most since 2008

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

READ: Why the rand will face more manic Mondays after plunging 9%

The rand plunged as much as 9%, the most since October 2008, to R17.9169 per dollar, before paring losses. It was trading down 2.1% at R16.6468 by 10:04 in Johannesburg, the biggest decline among 31 emerging-market and major currencies.

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

The JSE's All-share Index dropped 1% to 47 634.45, the lowest since December 14, as more than five securities tumbled for every one that rose. Yields on rand-denominated government bonds jumped 17 basis points to 9.71%.

One-month implied volatility surged 4.79 percentage points to 24.69% after the Standard & Poor’s index of shares fell 6% last week in the biggest decline since 2011.

The rand’s slide 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.

Risk aversion

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

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. South Africa sold 37% of its exports to China in 2014.

Zuma told eNCA television on Sunday that he would not take responsibility for the aftermath of his decision, instead saying that everyone had overreacted.

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

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

The rand plunged to its all-time low shortly after midnight in Johannesburg. Data compiled by Bloomberg showed that offers to buy the rand against the dollar dried up at around 07:04 Tokyo time.

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, while swings in local asset prices have revived concern about the government’s ability to manage an economy set to grow at the weakest pace since 1990.

READ: Battered rand will bring pain to SA, warn economists

sarb  |  markets  |  currencies  |  repo rate  |  rand


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