JOHANNESBURG: South Africa's rand plunged to new four-year lows on Friday, fanning fears of inflation in Africa's biggest economy and forcing investors to contemplate interest rate hikes even as growth slows.
A worse-than-expected April trade deficit number piled on the pressure, pointing to a widening current account gap which at over 6 percent of GDP has long been an Achilles heel for the currency.
The rand fell to 10.2850 to the dollar, its lowest since March 2009, on track for its worst monthly performance since September 2011. By 1521 GMT it had recovered to 10.0855 but was still down 0.43 percent from Wednesday's close.
Investors have hammered the currency - seen as a gauge of international appetite for South African assets - on concerns that labour unrest in the mining industry will hobble growth.
Data this week showed economic growth slowing to a feeble 0.9 percent in the first three months of the year, the most sluggish pace since a 2009 recession.
On Friday, the rand shed about 4 cents after data showing the April trade shortfall widened to 15 billion rand from 7.7 billion rand the previous month.
Investors have also been dumping South African debt, with overseas accounts being net sellers of government bonds for the past two weeks.
The short end of the yield curve spiked on Friday, with the yield on the 2015 bond climbing 33.5 basis points to a nine-month high of 5.81 percent.
"There was a turnaround on the short-end of the curve, which has now started pricing in interest rate hikes given the extent of the rand depreciation over the past two weeks," Rand Merchant Bank (RMB) said in a note.
The R186/R157 yield spread - the difference between yields on short- and long-dated benchmark bonds - dropped 14 basis points as dealers started pricing in a potential rate hike by the South African Reserve Bank (SARB).
An attempt by President Jacob Zuma on Thursday to allay investor concerns misfired badly, with the rand falling sharply after his comments failed to bolster confidence.
The currency has shed more than 12 percent against the dollar this month.
It has tumbled nearly 20 percent this year, with only the Venezuelan bolivar, the Syrian pound and the currencies of neighbours Lesotho, Swaziland and Namibia faring worse on the globe.
As the rand extended its three-week plunge, Forward Rate Agreements began pricing in a greater than 50 percent chance of an interest rate hike in the next few months.
The currency has borne the brunt of heavy emerging market selling this week amid concerns about growth in China, which absorbs a large chunk of commodities from the region.
"The biggest risk of even further sell-off is for the rand, where, besides the large current deficit, labour market unrest and ongoing strikes in the mining industry further undermine investors' confidence in South Africa," said Danske Bank.
But the rand could correct in the coming sessions, as it did during a previous rout in 2008 in the aftermath of the collapse of Lehman Brothers.
"The market is in an extreme overbought state, with the 14- day RSI reaching close to 90," said Kamran Sheikh, a technical analyst for Informa Global Markets.
Within the last 20 trading days, there have been only two marginal down days. I think we might be pretty close to a correction, at least to 9.5000."
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