Ayanda Shezi With Bloomberg
16 May 2006
Johannesburg — THE rand slid to five-month lows against the dollar yesterday, dragged down by international investors' rapidly cooling sentiment towards emerging markets, which also saw the JSE fall more than 3%. The rand lost as much as 3,2%, to R6,50 to the dollar, its lowest level since December.
Analysts said yesterday rand weakness was not expected to last long, as the currency was likely to recover on the back of strong precious metals prices.
However, volatility in the currency markets is expected throughout the week.
Finance Minister Trevor Manuel, speaking yesterday at the African Development Bank's annual meeting in Ouagadougou, Burkina Faso, warned that fluctuations in commodity prices were a "potential source of volatility".
"I'm not a harbinger of doom, but I think you're going to see these types of incidents," he said.
"There is no cause for skittishness," Manuel said. "Our economic fundamentals are sound."
The rand sell-off was sparked by the US Fed's decision to increase interest rates last week, prompting investors to plough their money into dollar-denominated assets, analysts said.
The fall in the rand is not good news for SA's inflation outlook, given the volatility in oil prices.
Analysts said the sell-off was likely to be temporary as fundamentals supported a weaker dollar and higher commodity prices.
"At this stage, rand weakness is attributable to short-term factors, but could reach R6,60-R6,70 against the dollar before reversing back to the R6 level," said Absa treasury economist Chris Hart.
The local currency also fell sharply against the euro (2,5%) and pound (2,3%), ending the day at R8,30 and R12,12 against the two currencies, respectively.
Rennies Bank's Lee Naisbitt said emerging markets with high current account deficits, such as Turkey and SA, were vulnerable to a change in sentiment.
Investor aversion to emerging market assets might make it harder for these countries to finance their current account deficits.
"This would explain why the rand has failed to respond to the impressive performance of commodity prices, precious metals in particular, and could weigh on the currency through the week ahead," Naisbitt said.
"Emerging market fears raised the general level of risk aversion, and sentiment towards the rand soured."
SA's current account deficit on the balance of payments widened to 4,2% of gross domestic product (GDP) last year, and although capital inflows into the country rose to a record last year, there are worries that SA may not be able to attract a similar amount this year.
"Market participants are also pointing fingers at the host of corporate deals that are taking place, where local companies are looking to expand offshore through acquisitions," said Naisbitt.
The Turkish lira, Indonesia's rupiah and the Brazilian real were among currencies affected in the emerging market sell-off, sending equity markets in those countries into turmoil.
"Price movements in the local currency are unlikely to go unnoticed by monetary authorities, who remain vigilant for factors which undermine the inflation target," Brait economist Colen Garrow said. "Any protracted period of currency weakness may be met by more than moral suasion."
The Reserve Bank has said monetary policy bias is towards an increase in rates, rather than a cut.
The JSE followed global equity markets down yesterday, with the all share index dropping 3% to 21084. Gold and platinum shares together lost almost 8%.
Claims by the Saudi Arabian oil minister that the Organisation of Petroleum Exporting Countries (Opec) was increasing capacity enough to meet demand also helped push prices lower.
Yesterday, Brent crude was 2,5 % lower, at $70,50 a barrel. Markets are expected to open softer today.
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