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Rand drops on spectre of US interest rate hike

SOUTH Africa’s rand fell in early trade yesterday as the US dollar gained after United States Federal Reserve chair Janet Yellen said she was “looking forward” to the first US interest rate increase in nearly a decade.

Financial matters by IH

Stocks opened lower, with telecoms company MTN Group in the spotlight. Nigerian authorities reduced by more than a third, to US$3,4 billion, a fine imposed on MTN for failing to cut off unregistered users.


MTN was up nearly 1% at 147,90 rand, outpacing a 0,4 decline to 45,777 in the JSE Top-40 index.

The rand was trading at 14,3700 in morning trade, down 0,13% from Wednesday’s close. The rand fell to an all-time low of 14,4950 to the US dollar on Tuesday.

A US rate increased is widely expected hike when the Fed meets later this month. When she spoke at the Economic Club of Washington on Wednesday, Yellen did not say whether an increase would be warranted at that meeting, but she did say keeping rates at zero for too long could threaten financial stability.

Yellen was scheduled to speak again yesterday and traders expect the rand to remain under pressure.

“Given that she will most likely maintain her more hawkish rhetoric, we expect the rand to remain vulnerable to intensified Fed rate hike expectations,” Barclays Africa currency strategist Mike Keenan said.

Her comments sent the US dollar index, which measures the greenback against a basket of six major currencies, to its highest level since April 2003. The rand remained resilient, on the strength of loan agreements between China and South Africa, but then gave up some gains in early trade.

China signed 26 agreements pledging to invest US$6,5bn to support South Africa’s flagging economy and its own exports to the nation, as Chinese President Xi Jinping met with counterpart Jacob Zuma ahead of a summit this week with leaders from across the continent.

The deals include a US$2,5bn credit line provided by China Export & Credit Insurance to South African rail and transport operator Transnet for electrical and mechanical equipment, and a US$500-million China Development Bank loan-finance accord that will help electricity utility Eskom to complete its power plant construction plan.

South Africa suffers from a chronic electricity shortage that is increasing costs for industry and discouraging investment. Part of its response is to build new nuclear plants, which experts say may cost as much as US$100bn.
On the fixed-income market, government bonds were mostly firmer, with the yield for debt due in 2026 shedding 1,5 basis points at 8,6%.

The agreements were signed on Wednesday in Pretoria. Xi arrived earlier in the day from neighbouring Zimbabwe, where he had held talks with President Robert Mugabe and signed aid deals for projects ranging from power to infrastructure.

“Our two countries complement each other strongly economically,” Xi told reporters after the signing ceremony.
“Our co-operation on international affairs is becoming ever closer. China-South Africa relations are in the best shape ever.”

Xi is on a five-day African visit that includes the Forum on China-Africa Co-operation with leaders from across the continent in Johannesburg today and tomorrow. Chinese commerce with Africa reached US$220bn last year, making it the continent’s biggest trade partner. One of the agreements is aimed at synchronising discrepancies in trade statistics.

The Chinese Ministry of Commerce said last month that the country’s investment in Africa fell by more than 40% in the first half of 2015.

Beijing Automotive Group will invest as much as R11bn in what could become the biggest car plant in South Africa, Geoffrey Qhena, the chief executive officer of South Africa’s Industrial Development Corporation, said in an interview. Production may start at the end of 2017, with some of the cars probably being exported to other parts of Africa, he said.

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