Bloomberg News

Rand Weakens Versus Dollar, Euro as Carry-Trade Appeal Wanes

June 06, 2011

June 6 (Bloomberg) -- The rand snapped a four-day advance against the dollar and weakened for a second day against the euro on speculation Africa’s biggest economy will lag developed nations in raising interest rates.

The rand depreciated 0.6 percent to 6.75 per dollar by 4:47 p.m. in Johannesburg, dollar, paring its gain against the greenback since May 23 to 3.9 percent. The currency slipped as much as 0.5 percent to 9.8714 per euro, and traded 0.4 percent weaker at 9.8597.

The European Central Bank may signal on June 9 that it will raise its benchmark interest rate a second time this year, after producer-price inflation in the 17-member group accelerated faster than economists’ expectations in April. The Bank of England announces its rate decision on the same day.

“The main event is probably Thursday’s ECB meeting,” John Cairns and Nema Ramkhelawan, currency strategists at Rand Merchant Bank in Johannesburg, said in a research note. “Expectations are that they will signal a hike in July by noting ’strong vigilance’ over inflation.”

An increase in the ECB rate would erode returns for carry- trade investors, who borrow at low interest rates and invest the proceeds in higher-yielding assets. South Africa’s benchmark central bank rate is 5.5 percent, compared with 0.25 percent in the U.S. and 1.25 percent in the eurozone.

Traders are reducing bets the South African Reserve Bank will raise its rate this year. Forward-rate agreements starting in September, which investors use to lock in interest rates, dropped 2.5 basis points, or 0.03 percentage point, today.

Rand ‘Overvalued’

The rand’s decline came after Trade and Industry Minister Rob Davies said the currency is overvalued and undermining the country’s manufacturing industry.

Manufacturing, which makes up 15 percent of the economy, was the best-performing industry in the first quarter, expanding 14.5 percent compared with annualized growth of 4.8 percent in gross domestic product. That performance may not last, Davies said.

Manufacturers “would have made more progress if we had a more competitive currency” which was inflated due to capital inflows, some of which stem from quantitative easing in the U.S., Davies said. “It’s fuelling an appreciation of our currency,” he said.

Bonds gained, driving yields to the lowest in almost five months, on speculation the rand’s 2.5 percent gain against the dollar since May 23 will slow price increases, reducing pressure on the central bank to lift interest rates this year.

Bond Rally

“There is no doubt that if the rand manages to stage a stronger recovery, especially against the dollar, that investors will need to revise downwards their expectations of inflation and therefore interest rates,” Tradition Analytics researchers led by Johannesburg-based Quinten Bertenshaw said in a research note. “The bias appears to be in favor of further bond market gains at this point.”

The 13.5 percent notes due 2015 climbed 19 cents to 121.79 rand, driving the yield down five basis points, or 0.05 percentage point, to 7.43 percent, the lowest on a closing basis since Jan. 12. The 6.75 percent securities due 2021 rose 37 cents to 90.21 rand, reducing the yield six basis points to 8.22 percent.

Foreign investors were net buyers of 2.4 billion rand ($355.6 million) of South African bonds last week, boosting flows into the country’s debt this year to 23 billion rand, according to JSE Ltd. data.

--Editors: Ana Monteiro, Tim Farrand

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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