Morgan Stanley warns rand is most vulnerable to US yield rise

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.

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“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.

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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.

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