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SA's rand weakens on economic outlook

May 14 '16 | By La Afrique Media | Views: 161 | Comments: 0
South Africa's rand fell nearly 2% against the dollar on Friday, weighed down by a pessimistic outlook for the economy and also reflecting the greenback's broad based gains as investors bet on higher US interest rates this year.

Stocks however ended in the black, led by gold miners which climbed despite a court decision paving the way for a class action suit against the sector on behalf of thousands of workers who contracted the fatal lung disease silicosis. Most of the rand's losses came after Standard & Poor's warned that it was concerned about South Africa's dismal economic growth and its reliance on capital flows.

The rand tends to fare worse than its emerging market peers during episodes of global risk aversion.

The rand tends to fare worse than its emerging market peers during episodes of global risk aversion, rendered vulnerable by South Africa's reliance on portfolio inflows to plug a current account deficit of more than 5% of GDP.

Emerging market currencies, which offer higher returns but carry more risk for investors, were generally under pressure after stronger-than-expected US economic data appeared boosted expectations the Federal Reserve may raise US interest rates more than once this year.

South Africa's central bank, on the other hand, is expected to keep domestic rates on hold next Thursday amid concerns about the ailing economy, according to economists surveyed in a Reuterspoll this week. 

On Friday, South African Reserve Bank's Deputy Governor Daniel Mminele said the economy was flat on its back and growth was below what was needed to create jobs.

Even if policymakers hold rates at 7% as expected next week, the volatility in the rand, as well as the threat of a sovereign downgrade to sub-investment grade this year, will keep the central bank nervous. 

"It should, therefore, maintain its rhetoric that the weak rand remains one of the largest upside risks to the domestic inflation outlook," BNP Paribas analyst Jeffrey Schultz said.

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