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The rand is taking a larger knock than most of its emerging-market counterparts, as the country’s inflation outlook is worsened by an energy crisis and Chinese economic fears. On Monday, the currency fell for the second day in a row, to its lowest level in more than a month, as oil prices rose and traders worried about China’s development challenges and how that might effect raw material costs, which account for nearly half of South Africa’s exports.
The lower currency, combined with the highest crude-oil prices in more than two years, boosted breakeven rates, which represent bond investors’ target price, to levels last seen in June 2019. “Sentiment still seems very nervous and there is a lot to absorb,” said Matete Thulare, an analyst at Rand Merchant Bank in Johannesburg. It’s “safe to assume that the risk bias remains for rand weakness,” he wrote in a client note.
South Africa is susceptible to variations in the price of oil since it imports its; gasoline accounts for over 5% of the country’s inflation basket. Oil price increases would feed price increases across the economy, straining the central bank’s goal of keeping inflation under control without suffocating the fragile recovery from the pandemic-induced contraction. The rand is influenced by the fortunes of China, the largest buyer of South African commodity exports. The rand has been supported by high commodity prices, which have helped South Africa maintain a current-account surplus this year.
This could change when the Chinese economy slows and demand falls. Nickel and tin prices plummeted in London on Monday as China’s power outage expanded from manufacturers to households, putting supply chains, demand, and the economy’s recovery at danger. The rand dropped by more than 2%. It was trading at R15.08 per dollar on Monday afternoon. The yield on benchmark 10-year securities increased for the sixth consecutive day to 9.60 percent. This is the highest level seen since July 2020. They will continue to grow as investors demand more compensation for the risk of inflation.
According to the Bloomberg Emerging Market Local Currency Index, the bonds have lost 4.8 percent in dollar terms this month, making them one of the worst performers among peers in Africa and the Middle East. In terms of developing countries, only Turkey and Chile have experienced declines.