South African rand extends gains with bonds after rate increase

South Africa’s rand and bonds gained, heading for their biggest rally in eight months, after the country’s central bank raised borrowing costs before an anticipated rise in U.S. interest rates next month.

The rand strengthened for a fifth day against the dollar, taking the week’s gains to 3 percent, the most since March 20. Yields on benchmark government bonds have dropped 21 basis points in the past five days to a two-week low, while FTSE/JSE Africa All Share Index gained 1.9 percent in the period in its first weekly advance since Oct. 5.

South African Reserve Bank Governor Lesetja Kganyago lifted the benchmark interest rate by 25 basis points to 6.25 percent on Thursday, forestalling a Federal Reserve move that would erode the relative attractiveness of South African assets. The Fed is poised to increase rates in December, minutes from the central bank’s last policy meeting revealed this week.

“Front-running the Fed puts South Africa in better stead than where it was” before Thursday’s rate increase, Thando Vokwana, a currency trader at Rand Merchant Bank, said by phone from Johannesburg. “The Fed certainly looks like it’s about to hike in December.”

While the Monetary Policy Committee lowered its inflation and growth forecasts for this year, it warned of the potential for currency turmoil in the event of Fed tightening, and the risk of price pressures spreading because of a weakening rand. Currencies and stocks across emerging markets staged their biggest rally in six weeks on Friday as the Fed signaled it will raise interest rates gradually, spurring optimism for a tempering in outflows from riskier assets.

“What’s worried the market the most is the complete lack of direction from the Fed in the last year in terms of their interest rate cycle,” Michele Santangelo, a portfolio manager at Vunani Private Clients, said by phone from Johannesburg. “At the moment there’s a lot more certainty. We’ve seen emerging-market currencies come back a little bit and a little bit more positivity coming into the emerging markets stock markets.”

The rand gained 0.7 percent to 13.9362 per dollar by 1:10 p.m. in Johannesburg, the strongest level on a closing basis since Nov. 5 and paring its decline this year to 17 percent. Yields on the government bonds maturing in December 2026 dropped 5 basis points to 8.41 percent, the lowest since Nov. 3.

African central banks from Zambia to Uganda have been raising interest rates this year as sliding commodity prices and speculation of Fed tightening pushed currencies to record lows. Ghana and Mozambique raised borrowing costs on Nov. 16, while Kenya left its key rate unchanged a day later after 300 basis points of increases earlier this year. Before Thursday, the South African Reserve Bank had raised the repurchase rate by 1 percentage point since January last year.

The All Share Index dropped 0.1 percent to 52,060.74 after gaining 0.9 percent yesterday, buoyed by a rally in prices of metals including gold and platinum. AngloGold Ashanti Ltd. added 2.9 percent on Friday, while Gold Fields Ltd. advanced 4 percent and Royal Bafokeng Platinum Ltd. climbed 5.2 percent. Lonmin Plc surged 27 percent after shareholders on Thursday approved a bailout plan for the troubled platinum miner.

 – Bloomberg[Xola Potelwa and Neo Khanyile]