Morgan Stanley warns rand is most vulnerable to US yield rise

iStock

The rand is most vulnerable to the rise in US Treasury rates among its emerging-market peers, according to Morgan Stanley, which predicts further weakness for the battered currency as the country’s finances deteriorate.

The rand may decline about 6% to 15.50 per dollar in the run-up to the medium-term budget statement on October 24, Morgan Stanley strategists including Min Dai wrote in a report. Investors will watch the budget update for signs of fiscal slippage as sluggish economic growth curbs tax revenue.

“We remain convinced that South Africa will underperform into the medium-term budget update,” the strategists said. With foreign investors holding about 40% of the government’s rand-denominated bonds, “we believe that South Africa is the most vulnerable country in the current environment,” they wrote.

The rand slumped 2% on Wednesday as 10-year US Treasury yields climbed to the highest level since 2011, attracting money to the dollar and damping appetite for riskier assets.

The currency extended its decline on Thursday, weakening 0.5% to 14.7190 per dollar by 14:37 in Johannesburg. The probability of the rand hitting 15.50 by October 24 is 25%, according to Bloomberg’s forecast model.

Foreign investors have sold a net R55.7bn of South African bonds this year, according to JSE data, with the sell-off gathering momentum since the beginning of the second quarter.

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

ZAR/USD
16.55
(+0.78)
ZAR/GBP
20.92
(+0.37)
ZAR/EUR
18.93
(+0.67)
ZAR/AUD
11.62
(+0.40)
ZAR/JPY
0.16
(+0.47)
Gold
1807.86
(-0.06)
Silver
19.25
(-0.03)
Platinum
830.00
(+0.18)
Brent Crude
43.06
(+0.42)
Palladium
1963.00
(+0.31)
All Share
56374.05
(+1.52)
Top 40
52048.69
(+1.59)
Financial 15
10697.88
(+1.61)
Industrial 25
76413.30
(+1.19)
Resource 10
54358.32
(+2.14)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 2178 votes
I am taking a hit, but should be able to recover in the next year
23% - 2787 votes
My finances have been devastated
35% - 4217 votes
It's still too early to know what the full effect will be
25% - 3023 votes
Vote