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The rand weakened to its worst level in three years and yields on local-currency bonds rose as concerns over South Africa’s continuing energy shortage and deteriorating economic outlook intensify among investors.
The currency of South Africa’s weakened as much as 1.1% on Wednesday to R18.8368 per dollar, the biggest loss among major emerging markets to the lowest since May 2020. MSCI’s gauge of emerging-market currencies was 0.2% higher on the day.
USD/ZAR: Rand is again completely out of step with comparable Emerging Market currencies. It is by far the worst performing EM currency today. pic.twitter.com/HeKIMpmuEp
— Karin Richards (@Richards_Karin) May 10, 2023
Rand-denominated government securities also sold off at the longer end. Yields on bonds maturing in 2048 climbed for a fifth day, the longest streak since August. At 12.2%, they are at their highest since March 2020.
Eskom has been implementing rolling blackouts since 2008 to reduce reliance on its ailing power plants. Those outages have intensified in recent years and the country has been subjected to 16 consecutive months of blackouts that can last as long as 12 hours a day. The company said over the weekend it would remove as much as 6 000 megawatts of capacity from the national grid indefinitely.
The rand had been stuck in a range of between R18 and R18.50 for about a month, then weakened after news that load shedding would remain at higher levels indefinitely. The pound-rand cross has also shifted, with the pair touching its highest since January 2016 in intraday trade on Wednesday.
"The power crisis and the associated load shedding means the economy is at risk of stagnation with severe bottlenecks overall in infrastructure and through supply chains," said Erik Meyersson, chief emerging-markets strategist at SEB AB in Stockholm.
"Add to this some recent sluggish high-frequency statistics, an acceleration in consumer price inflation, and investors will likely have cause to worry about the near-term economic prospects in South Africa," Meyersson said.
South African equities were relatively stable, with the benchmark index up 0.3% by 16:00 in Johannesburg, buoyed by gains in mining shares and tech investors Naspers and Prosus.
Earlier this week, Treasury officials confirmed that a budget surplus was no longer likely for South Africa, predicting a miss of about R27 billion after revenue collections fell short.
Global interest rates will fall over next year. Growth will recover. Commodities will recover/may be quite strong given lack of supply. In this environment the rand will strengthen. We forget that the rand has always recovered after a collapse followed by a commodity recovery
— Wayne McCurrie (@WayneMcCurrie) May 10, 2023
Traders in the options markets are beginning to position for further rand losses, even after a US inflation report matched expectations. The currency briefly rebounded off its lows following the data, but soon weakened again. One-month risk reversals climbed for a fourth day, the longest streak in two months.
A breach of R18.72 per dollar could see the rand weaken to R19 soon after, said Warrick Butler, head of foreign exchange trading at Standard Bank in a note to clients.
