ZAR Drops Versus USD as Fed Rate Increase Expectation Grows

South Africa’s rand weakened for a third day, breaching 11 per dollar for the first time since February, on speculation the Federal Reserve may be set to raise interest rates as the U.S. economy recovers.

The rand declined 0.3 percent to 10.9555 per dollar as of 1:31 p.m. in Johannesburg after falling as low as 11.0162, the weakest level since Feb. 21. A measure of rand volatility reached its highest level in three months.

Investors are betting South Africa’s central bank will leave its policy rate unchanged next week even as economic data from the U.S. back the case for a rate rise that would lure investment to the dollar. South Africa’s current-account deficit widened in the second quarter, a report showed yesterday.

“A lot depends on next week’s rate announcement — that’s going to be crucial for the rand,” Ion de Vleeschauwer, chief dealer at Bidvest bank Ltd., said by phone from Johannesburg. “The market has discounted that we’ll not see a rate increase.”

The Monetary Policy Committee, which has lifted the policy rate 75 basis points to 5.75% in two moves this year, will announce its decision on Sept. 18. Forward-rate agreements, used to speculate on interest rates, are predicting less than a 50 percent chance of another increase.

The dollar strengthened against most of its higher-yielding peers today and rose to the most in six years versus the yen on expectations U.S. employment data tomorrow will support arguments for a rate increase next year, damping investor demand for emerging-market assets.

Foreign investors sold a net 1.8 billion rand of South African bonds yesterday, the biggest outflow in a day since Aug. 22. South Africa depends on investment in its bond and stock markets to finance its current-account deficit, which swelled to 6.2 percent of gross domestic product in the three months through June.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza