Johannesburg - The rand weakened to a record and South African stocks fell to three-week lows on concern slowing growth in China will weigh on the continent’s second-largest economy.
The rand dropped the most among 31 emerging-market and major currencies tracked, tumbling as much as 2.1 percent to R16.2027 per dollar yesterday, as China’s move to weaken the yuan’s reference rate by the most since August spurred a sell-off that knocked global equities and currencies, sent oil prices tumbling to 12-year lows and cut prices on commodities from platinum to copper.
South Africa’s benchmark share index slid as much as 3 percent to the lowest since December 14 and 10-year bonds ended four days of gains.
“Emerging markets unfortunately remain on the back foot because you’ve got a strong US dollar that’s likely going to remain strong for most of this year, if not get even stronger,” Mohammed Nalla, the head of strategic research at Nedbank Group, said.
“That’s going to keep commodities on the back foot, it’s going to keep emerging markets in general on the back foot and that thrown in with the uncertainty around China makes for a rather toxic confluence of events for an economy like South Africa.”
The rand plunged 25 percent against the dollar last year, the worst performance after Brazil’s real among major currencies tracked.
The South African currency has been under pressure because of a slump in commodity prices, lacklustre economic growth and rising interest rates in the US.
It fell to a record low of R16.0543 against the dollar in December after President Jacob Zuma unexpectedly fired his finance minister and has dropped 4 percent so far this year.
The currency declined 1.5 percent to R16.0907 against the dollar by 3.07pm yesterday.
That pushed the pair’s 14-day relative strength index to 75, above the 70 level that signals to some technical analysts that the rand’s decline had gone too far, too fast.
“Short term, I expect a pullback just simply because on a technical basis we have been extended for quite some time,” Nalla said.
“Usually when you see this kind of price action the market wants a little bit of a breather. So on a technical basis alone I would expect us to pull back maybe into the mid-15s, maybe 15 if we’re lucky; however, longer-term we remain remarkably bearish.”
Yields on government rand bonds due by December 2026 climbed 9 basis points to 9.64 percent.
The all share index slipped 2.4 percent to 47 930.24 points as 140 stocks fell, 20 rose and four were unchanged.
Any rebound might be short-lived as long as external factors weighed on the rand, said Piotr Matys, an emerging markets currency strategist at Rabobank.
The currency’s decline might force the Reserve Bank to raise interest rates at the next policy meeting on January 28 even as growth slowed, he said.
“There are some warning signals that the rally in dollar- rand is somewhat stretched if you look at momentum indicators,” Matys said. “But even if we see a correction, it seems that unless we witness signs of stabilisation in China, a sustainable retracement is an unlikely scenario.”
BLOOMBERG