Bloomberg News

Rand Falls First Day in Four as Lower Inflation Fuels Rate Bets

July 18, 2012

The rand declined for the first time in four days after the inflation rate fell for a second straight month in June, giving the central bank more scope to cut borrowing costs to support growth in Africa’s biggest economy.

South Africa’s currency retreated 0.2 percent to 8.1835 per dollar as of 10:47 a.m. in Johannesburg. Yields on the nation’s 6.75 percent bonds due 2021 rose one basis point, or 0.01 percentage point, to 6.81 percent. The yield dropped 37 basis points in the previous six days to a record 6.79 percent yesterday.

The consumer inflation rate fell to 5.5 percent from 5.7 percent in May, Pretoria-based Statistics South Africa said. The median estimate in a Bloomberg survey of 18 economists was 5.6 percent. Forward-rate agreements are pricing in a 70 percent probability of a rate cut by year-end, which would reduce returns for investors who borrow in dollars to buy high-yielding currencies, known as the carry trade.

“We keep a negative view on the rand, as it is vulnerable to renewed market volatility and the bleak global economic outlook,” Esther Law, the London-based director of emerging- market strategy at Societe Generale SA, and colleagues wrote in e-mailed comments. “The currency will not find support from the Reserve Bank.”

The central bank’s Monetary Policy Committee will leave its benchmark repurchase rate unchanged at 5.5 percent tomorrow, 16 out of 18 economists in a Bloomberg survey said. Governor Gill Marcus may lower forecasts for growth and inflation, setting the stage for a cut by year-end, Standard Bank Group Ltd. said.

‘Rand Negative’

“A rising discounted probability of a rate cut would be rand negative in an international financial market environment motivated by interest differentials,” Bruce Donald, a Johannesburg-based currency strategist at Standard Bank, said in e-mailed comments.

Forward-rate agreements, used to speculate on interest rates, have declined six basis points in the past month to 5.21 percent. The rate is 37 percentage points lower than the Johannesburg Interbank Agreed Rate, indicating that traders are pricing in more than a 70 percent probability of a rate cut within the next six month.

Yields on South Africa’s $1.5 billion of 4.665 bonds due 2024 dropped five basis points to 3.21 percent, the lowest since they started trading on Jan. 12.

To contact the reporter on this story: Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

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


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