Johannesburg - South Africa’s rand is on course to snap four straight monthly declines as growth revives, tempering investor inflation expectations and easing pressure on the central bank as it weighs how aggressively to raise rates.
The rand rose 3.7 percent against the dollar this month through yesterday, the third-best performer among 16 major currencies tracked by Bloomberg.
One-year interest-rate swaps, used to lock in borrowing costs, dropped 36 basis points in the period, compared with a 17 basis-point advance in similar Turkish contracts.
Five-year break-even rates, a gauge of inflation predictions, have dropped since the central bank raised rates January 29.
Momentum may be building for the rand, which has responded to last month’s unexpected interest rate increase by central bank Governor Gill Marcus amid signs the worst of the nation’s economic slump may be past.
Gross domestic product grew 3.8 percent last quarter, the fastest pace in two years, as mining and manufacturing recovered from strikes, a government report yesterday showed.
“The recent mild appreciation in the rand is encouraging and it may go some way towards staying the Reserve Bank’s hand in terms of the likelihood of further rate hikes,” Goolam Ballim, chief economist at Standard Bank Group Ltd., Africa’s largest lender, said by phone from Johannesburg yesterday.
“The Reserve Bank might pursue a heightened vigilant stance with no rate hike at its next meeting.”
Yields Fall
Africa’s largest economy grew 1.9 percent in 2013, down from 2.5 percent the previous year and the slowest pace since the 2009 recession. A slump in metal prices, a consequence of China’s cooling economy, prompted miners to close shafts and fire staff.
Yields on South Africa’s benchmark rand-denominated bonds due December 2026 fell four basis points, or 0.04 percentage point, to 8.50 percent as of 12:30 p.m. in Johannesburg.
The rand strengthened 0.2 percent to 10.7082 per dollar, near the strongest level in six weeks.
The advance pared its decline over the past 12 months to 18 percent.
“The few cents that the rand gained recently doesn’t make a dent in the slide since a year ago,” Christie Viljoen, senior economist at NKC Independent Economists, said by phone from Paarl, South Africa, yesterday.
“The influence of the rand on inflation isn’t really going to make a difference. The currency is hopelessly too weak.”
Inflation Breach
About 70,000 members of the Association of Mineworkers and Construction Union went on strike at the world’s biggest platinum producers, including Anglo American Platinum Ltd. and Impala Platinum Ltd., on January 23.
Workers are demanding a doubling in entry-level wages to 12,500 rand ($1,165) per month.
South Africa relies on foreigners investing in the nation’s bonds and stocks to plug a current-account deficit equal to 6.8 percent of gross domestic product in the third quarter.
The nation relies on imports for 70 percent of its oil needs.
Marcus said last month that inflation will breach the 3 percent to 6 percent target in the second quarter after she unexpectedly adjusted borrowing costs for the first time since July 2012, increasing the benchmark rate by 50 basis points to 5.5 percent.
The consumer price index accelerated 5.8 percent in January from 5.4 percent the previous month.
The inflation rate usually gains 0.2 percentage point for every 1 percent drop in the rand, according to central bank models.
The yield gap between fixed-rate debt due in five years and similar-dated inflation-linked bonds, a measure of price expectations, declined 41 basis points since the day the central bank raised interest rates on Jan. 29.
“The Reserve Bank’s main focus is on inflation and lower imported inflation is a result of a stronger rand,” Ion de Vleeschauwer, chief currency dealer at Bidvest Bank Ltd., said by phone from Johannesburg yesterday.
“The rand’s gain relieves pressure from imported inflation such as oil shipments.” - Bloomberg News