Bloomberg News

Rand Declines, Erasing Advance, on U.S. Debt, Growth Concern

August 01, 2011

Aug. 1 (Bloomberg) -- The rand declined versus the dollar, erasing an earlier gain, after a report showed U.S. manufacturing expanded at the slowest pace in two years as lawmakers prepared to vote on a deficit-cutting accord.

The South African currency weakened as much as 0.6 percent to 6.7356 per dollar, erasing an earlier advance. It traded at 6.7318 per dollar as of 5:21 p.m. The rand appreciated 0.6 percent to 9.5700 per euro.

The euro slumped as much as 1.4 percent after the Institute for Supply Management’s factory index fell to 50.9 in July, from 55.3 the prior month. Emerging-market stocks pared gains and commodity prices tumbled. The House and Senate vote today on an agreement to raise the U.S. debt ceiling and lower the deficit to avoid a default tomorrow.

“There was a big sell-off in the euro, and that was the main driver for the rand,” Brigid Taylor, head of institutional flow sales at Nedbank Group Ltd., said by phone from Johannesburg. “There is still a lot of uncertainty around the U.S. debt deal.”

The rand often moves in tandem with the 17-member currency, which pays for 45 percent of South Africa’s exports, with a statistical correlation of 0.81 over the past month. A value of 1 would mean they moved in lock step.

Earlier, the South African currency pared gains after South Africa’s purchasing managers’ index declined to a two-year low in July as “prolonged” strikes curbed manufacturing operations in the continent’s biggest economy, raising concern about the strength of a recovery in Africa’s biggest economy. A level below 50 indicates a contraction in factory production, Kagiso Tiso Holdings said.

PMI ‘Negative’

“This data is negative for the rand,” Nomvuyo Guma, an analyst at Johannesburg-based Standard Bank Group Ltd., wrote in a research note. “Given the weight of the manufacturing sector in the economy, a potential contraction in this sector seriously dampens domestic growth prospects.”

Bonds surged, driving yield to the lowest in seven months, on speculation the central bank will leave borrowing costs unchanged this year to support a recovery in Africa’s biggest economy.

“The Reserve Bank will remain cautious of hiking interest rates at present,” Tradition Analytics researchers led by Johannesburg-based Quinten Bertenshaw said in a research note. “This will tend to keep local bonds supported going forward.”

The 6.75 percent securities due 2021 climbed 72 cents to 90.71 rand, reducing the yield 12 basis points, or 0.12 percentage point, to 8.156 percent, the lowest since Jan. 7.

--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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