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South African rand falls on China data; Deutsche Bank says buy local bonds

10/18/2021 | 11:44am EST
A South African Rand is seen in this illustration picture

JOHANNESBURG (Reuters) -South Africa's rand dropped on Monday as soft economic data in China, the country's largest trading partner, prompted investors to sell riskier assets.

Economic growth in China hit its slowest pace in a year in the third quarter, hurt by power shortages, supply chain bottlenecks and major wobbles in the property market.

However, Deutsche Bank recommended buying South African local bonds, saying central bank rate hikes were well priced in, a rise in domestic inflation was not extreme compared to emerging market (EM) peers and that rand bonds looked cheap.

At 1459 GMT, the rand traded at 14.6875 against the dollar, roughly 0.58% weaker on the day.

The U.S. dollar was up 0.1% against a basket of currencies, supported by rising Treasury yields and moving back towards a one-year high hit last week.

Deutsche Bank's move to "overweight" on South Africa fixed income follows a recommendation from JPMorgan to take profit on its "underweight" rand idea from last month.

"The key idiosyncratic factors that drove our bearish call on ZAR have all corrected to neutral levels," JPMorgan said, citing a shift in its EM foreign-currency risk appetite index and a realignment in the country's terms of trade.

This week, South Africa's domestic data calendar is light, with the September consumer price index on Wednesday likely to attract most attention.

Government bonds were weaker on Monday, with the yield on the 2030 bond rising 6 basis points to 9.470%.

Stocks also weakened, with the Top-40 index on the Johannesburg Stock Exchange closing down 0.45%, while the All-share index closed down 0.35%, in line with falls on global equities markets on China data.

Miners Anglo-American and Exxaro were among the worst hit, ending the day down 3.18% and 2.33%, respectively.

"We expect (China) GDP growth will slow significantly in Q4, largely due to the real estate weakness," lead economist Tommy Wu and head of Asia economics Louis Kuijs of Oxford Economics said in a note.

"In addition, high energy using firms in heavy industry could see further production cuts and COVID caution is likely to continue to hamper the consumption recovery."

(Reporting by Alexander Winning and Nqobile Dludla; Editing by Shailesh Kuber and Bernadette Baum)

ę Reuters 2021
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