Rand sinks most since 2008 as traders fret over China, liquidity

The South African rand plummeted by the most in more than seven years on Monday as the market turmoil in China and a drop in U.S. stocks deterred risk-taking.

The rand plunged as much as 9 percent, the most since October 2008, before trading down 2.3 percent at 16.6832 a dollar as of 10:57 a.m. in Singapore. One-month implied volatility surged 3.93 percentage points to 23.83 percent after the Standard & Poor’s index of shares fell 6 percent last week in the biggest decline since 2011.

The rand’s decline on Monday probably came after “a combination of stops and margin calls caused mass capitulation” by Japanese retail investors, Gareth Berry, a foreign-exchange strategist at Macquarie Bank Ltd. in Singapore, wrote in a research note. The South African currency, which dropped 25 percent last year, has been hurt by a slump in commodity prices, lackluster economic growth and rising U.S. interest rates.

“The huge spike in risk aversion last week, poor liquidity and position liquidation have hit the rand this morning,” said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking Corp. in Sydney.

Losses in the rand accelerated in December after President Jacob Zuma unexpectedly fired his finance minister only to alter the decision days later, while the tumultuous start to the year in China has further damaged sentiment. South Africa sold 37 percent of its exports to China in 2014 and the two countries — along with Brazil, Russia and India — are part of the so-called BRICS, a grouping of nations considered to show the growing influence of emerging economies.

China strengthened the yuan’s reference rate slightly for a second day on Monday after an eight-day run of reductions that sent shock waves through financial markets and escalated fears of a currency war. Most Asian exchange rates were down on Monday although not to the same extent as the rand: South Korea’s won fell 0.9 percent and Malaysia’s ringgit weakened 0.4 percent.

“The recent market turmoil has pushed volumes up and made carry trades less attractive,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. in Singapore. “I don’t think it was driven by any fundamental arguments,” he said, adding that the withdrawal of carry trades funded by Japan’s yen had helped weaken the rand.

 

– Bloomberg [With assistance from Elffie Chew, Netty Ismail and Tomoko Yamazaki].