Rand breaches key level, strongest against dollar since August

By Robert Brand

(Bloomberg) – The rand gained to its strongest level against the dollar since August, benchmark bond yields fell to the lowest in more than a month, and bank shares rallied as South African assets rode the risk-on wave following the Democratic Party’s House win in US midterm elections.

A collection of mixed denomination South African rand banknotes sit in an arranged photo in Johannesburg. Photographer: Waldo Swiegers/Bloomberg

Lower oil prices are also supportive of South African bonds and the currency, with inflation expectations as measured by break-even rates falling to the lowest level in more than two months on Wednesday.

Key insights
  • Weaker dollar post-midterms is benefiting emerging-market currencies, with MSCI’s gauge climbing for the first time in three days; as one of the most-traded currencies, the rand tends to lead gains or losses among developing-nation peers.
  • The rand closed below its 100-day moving average on Tuesday for the first time since April; the last time it held below that level, in December, it marked the start of a two-month, 18 percent rally.
  • Lower oil prices are improving South Africa’s inflation outlook. The five-year break-even rate – a gauge of investors’ expectations for average inflation over the period – dropped to 5.57 percent on Wednesday, the lowest since Aug. 28.
  • Outflows from the country’s bond market appear to be losing momentum, with average daily net sales by foreign investors dropping to R369 million ($26 million), from as high as R1.77 billion in June.
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