Bloomberg News

Rand Reverses Gain to Dollar as Greece Concern Trumps Inflation

June 22, 2011

June 22 (Bloomberg) -- The rand reversed its advance against the dollar as concern Greece won’t avoid a debt default outweighed speculation the central bank will raise interest rates after inflation quickened more than expected in May.

South Africa’s currency slipped as much as 0.9 percent to 6.7909 per dollar and traded at 0.5 percent down at 6.7576 by 3:42 p.m. in Johannesburg. It weakened 0.3 percent to 9.7122 per euro.

The euro fell against 10 of its 16 major peers amid speculation Greek Prime Minister George Papandreou will struggle to pass additional austerity measures, even after winning a confidence vote yesterday. The rand often tracks the euro, which accounts for 45 percent of South Africa’s exports and 34 percent of its imports, according to government data.

“With Greece’s government surviving the confidence vote, they can now agree on another austerity plan,” John Cairns and Nema Ramkhelawan, currency strategists at Rand Merchant Bank in Johannesburg, wrote in a research note. “The problem, however, is that the plan will have to pass a parliamentary vote next week. As such, the uncertainty continues, keeping any relief rally after yesterday’s vote contained.”

Greece needs to pass the austerity package to ensure it receives a 12 billion-euro ($17.2 billion) payment in July, part of last year’s 110 billion-euro bailout from the European Union and the International Monetary Fund.

Inflation Data

Earlier, the rand rallied to its strongest level against the dollar in almost two weeks after Papandreou won the confidence vote.

The rand extended its decline and bonds fell after the consumer inflation rate rose 4.6 percent in May, more than the 4.4 percent median forecast of 24 economists in a Bloomberg survey, from 4.2 percent the previous month, prompting investors to increase bets on a central bank interest-rate increase this year.

Forward-rate agreements for November, which investors use to lock in borrowing costs, jumped 3.5 basis points, or 0.035 percentage points, to 6.04 percent today, indicating investors are pricing in at least a 50 basis-point interest-rate increase.

“Our view that the repo-rate hiking cycling should start later this year remains,” Adenaan Hardien, chief economist at Cadiz Asset Management in Cape Town, said in a research note. “We see November as the likely month that sees the first hike, and we remain of the view that the cumulative hikes over this cycle is likely to be more aggressive than is generally anticipated.”

Bonds Retreat

While the Reserve Bank predicts that inflation will breach its 3 percent to 6 percent target range in the first quarter of 2012, it has kept its key interest rate at 5.5 percent this year, arguing price rises are driven by global fuel and food prices. The monetary policy committee is due to announce its next interest-rate decision on July 21.

Bonds declined, erasing earlier gains, on concern rising prices will erode investors’ returns. The 6.75 percent securities due 2021 dropped 7 cents to 89.18 rand, driving the yield up one basis point to 8.40 percent.

--Editors: Ana Monteiro, Linda Shen

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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