Rand Reels as Hawkish Fed and Trade War Add to Investor Worries

(Bloomberg) -- South Africa's rand headed for its worst drop against the dollar in two weeks as a hawkish Federal Reserve and escalating trade tensions weighed on emerging-market currencies.

A day after the Fed's upbeat assessment of the U.S. economy drove the dollar and Treasury yields higher at the expense of developing-nation asset prices, China further rattled investors by vowing to retaliate against President Donald Trump's latest trade salvo. A cocktail of negative local news, including the ruling party's land reform plans, layoffs in the platinum sector and post-election strife in neighboring Zimbabwe, also weighed on the rand.

The currency fell as much as 2.2 percent, the most in emerging markets, and traded 1.2 percent down at 13.3725 per U.S. dollar by 3:44 p.m. in Johannesburg, its weakest level since July 23 on a closing basis. Yields on benchmark government bonds due December 2026 climbed six basis points to 8.66 percent.

“It is a combination of mainly external factors: general sour global risk sentiment driven by renewed trade jitters between China and the U.S., and the stronger dollar on the back of the Fed meeting yesterday,” said Jakob Christensen, a Copenhagen-based analyst at Danske Bank A/S. “Given the rand is a more liquid emerging market currency, it takes a beating more than other emerging-market currencies when sentiment is hit.”

The dollar gained for a third day after the Fed on Wednesday left U.S. interest rates unchanged and stuck with a plan to gradually lift borrowing costs amid “strong” growth that backs bets for a hike in September. Rising U.S. rates would attract money to the greenback and away from emerging markets as their yield advantage erodes. The rand closely tracks the fortunes of the dollar, with the 30-day correlation in daily moves climbing 0.76 this week. A value of 1 would indicate they moved in lock step.

The escalating trade war between the U.S. and China is also taking its toll, with the rand particularly hard-hit amid a slump in prices of the precious and industrial metals that account for almost half of South Africa's exports. Impala Platinum Holdings Ltd., the country's second-biggest miner of the metal, said Thursday it will cut jobs and close shafts to stem losses, exacerbating a jobless rate that climbed to a 15-year high in the second quarter.

A plan by the ruling African National Congress to amend the constitution to allow the state to seize land without compensation for redistribution to the poor has also battered sentiment, with some investors worried it could undermine property rights.

Gauge of Sentiment

“The rand serves as a gauge for emerging-market currencies,” said Trieu Pham, a London-based emerging-markets strategist at ING Bank NV. “The general tone in South Africa has been weaker in markets as well though, driven by the headline on land expropriation without compensation.”

Things could get worse for the currency of Africa's most industrialized economy, according to Investec Bank Ltd.

“With the more hawkish tilt in the FOMC's tone currently pricing into the market, the rand on a near-term basis could move weaker,” Annabel Bishop, the chief economist at Investec, wrote in a client note.

The Johannesburg-based lender sees a risk of depreciation to 14 per U.S. dollar in the remainder of the third quarter. There is a 55 percent chance that the rand will touch that level by end-September, according to Bloomberg's probability calculator based on the prices of options to buy and sell the currency.

To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand

©2018 Bloomberg L.P.