Emerging-market currencies slump, but rand plunges to six-month low

The rand led emerging-market currency declines, extending a slump to a six-month low as investors bet that there was little chance the South African Reserve Bank would follow developing-nation peers in raising interest rates.

The currency weakened as much as 2.4% before paring the decline to trade 1.4% weaker at R13.1617 per dollar as at 11.42am in Johannesburg, leading declines against the dollar. Yields on benchmark government bonds due in 2026 soared 17 basis points to 8.97%, briefly spiking above 9% for the first time since December.

As one of the most-liquid emerging-market currencies, the rand is bearing the brunt of a selloff sparked by rising US rates, with the Federal Reserve expected to increase rates again next week. Turkey joined Indonesia and India in raising rates this week as their currencies sagged.

The Reserve Bank’s policy is to let the currency float freely, and it did not take action during bouts of currency weakness in the past two decades. The worst quarterly economic contraction in nine years suggests it won’t tighten anytime soon, according to Brown Brothers Harriman.

“Rand weakness reflects a broad re-pricing of emerging-market assets within a context of rising US interest rates,” said Win Thin, the firm’s global head of emerging-markets strategy. “This latest bout of rand weakness was triggered by the much weaker-than-expected first-quarter GDP report.” The rand has reached its worst level since December 15, days before Cyril Ramaphosa won the leadership of the ANC. The currency’s decline worsened after the drop in Brazil’s real damped sentiment towards risky assets, driving losses on a gauge that tracks emerging-market currencies to the most in more than a week.

The GDP report this week cast a pall over Ramaphosa’s promise to boost growth. His rise to power since December initially boosted sentiment and the rand following Zuma’s scandal-ridden tenure, but confidence indices have now returned to where they were late in 2017 as businesses seek lasting change.

The rand’s plunge exacerbated the worst bond selloff on record by foreign investors, who dumped a net R6bn worth of government debt on Thursday, according to the JSE. Average daily outflows in the past month rose to R1.4bn, the most on record, according to data compiled by Bloomberg.

After standing pat on the main policy rates in May, the Reserve Bank hinted that further loosening was off the table as inflation pressures built. Money markets are pricing in only 12 basis points of tightening over the next 12 months.

“It is clear that the economy is in a fragile state and it may take some time before we see any evidence of a Ramaphosa effect,” said Natalie Rivett, a senior emerging-markets analyst at Informa Global Markets in London.

With Ben Bartenstein Bloomberg