Morgan Stanley warns rand is most vulnerable to US yield rise

South Africa’s rand is most vulnerable to the rise in US Treasury rates among its emerging-market peers, according to Morgan Stanley, which predicts further weakness for the battered currency as the country’s finances deteriorate.

The rand may decline about 6% to 15.50 per dollar in the run-up to the medium-term budget statement on October 24, Morgan Stanley strategists including Min Dai wrote in a report. Investors will watch the budget update for signs of fiscal slippage as sluggish economic growth curbs tax revenue.

“We remain convinced that South Africa will underperform into the medium-term budget update,” the strategists said. With foreign investors holding about 40% of the government’s rand-denominated bonds, “we believe that South Africa is the most vulnerable country in the current environment,” they wrote.

The rand slumped 2% on Wednesday as 10-year US Treasury yields climbed to the highest level since 2011, attracting money to the dollar and damping appetite for riskier assets. The currency extended its decline on Thursday, weakening 0.5% to 14.71 per dollar by 2:37 pm in Johannesburg. The probability of the rand hitting 15.50 by October 24 is 25%, according to Bloomberg’s forecast model.

Foreign investors have sold a net R55.7 billion ($3.8 billion) of South African bonds this year, according to JSE data, with the sell-off gathering momentum since the beginning of the second quarter.