South Africa Rand Falls From Six-Month High on Importer Selling

By Garth Theunissen

July 30 (Bloomberg) -- South Africa's rand retreated from a six-month high against the dollar on speculation the country's importers are taking advantage of its gains to buy foreign currency.

The rand stayed weaker after a government report showed inflation was faster than forecast in June, exceeding the central bank's 3 to 6 percent target range for a 15th consecutive month. Consumer prices rose an annual 11.6 percent, compared with 10.9 percent in May, Pretoria-based Statistics South Africa said on its Web site today. Economists surveyed by Bloomberg had expected inflation to reach 11.3 percent.

``There are bucket loads of importers trying to get as much foreign currency as they can lay their hands on,'' said Ion de Vleeschauwer, chief trader at Bidvest Bank Ltd. in Johannesburg. ``They haven't seen the rand at such strong levels for quite a long time, so they're using it as an opportunity to increase foreign-currency holdings.''

The rand fell as much as 0.9 percent to 7.4272 per dollar and traded at 7.4107 by 1:54 p.m. in Johannesburg, from 7.3605 yesterday. Earlier the rand climbed to 7.3516 per dollar, the strongest level since Feb. 4. South Africa's currency also weakened against the euro, losing 0.7 percent to 11.5543.

South Africa's currency has risen for six straight weeks versus the U.S. currency, climbing about 10 percent since June 12, when the central bank raised its benchmark interest rate by a half-point to a five-year high of 12 percent. It has offered the best carry-trade return against the dollar, euro and yen over that period, according to data compiled by Bloomberg.

`Strong Run'

``The rand has had a really strong run and the carry trade is definitely behind it,'' said Ian Martin, a currency dealer at Rand Merchant Bank in Johannesburg. ``This strengthening trend will continue.'' Martin predicted the trend will only reverse if it falls to 7.51 per dollar.

In carry trades, investors borrow money at a low interest rate to buy assets that offer better returns. They earn the spread between the cost of borrowing and the profit from higher- yielding investments, taking the risk currency moves will erase their returns. South Africa's main interest rate is 1,150 basis points above Japan's and 925 basis points higher than Switzerland's.

The yield on South Africa's benchmark 13.5 percent security due September 2015 fell 12 basis points to 9.40 percent. The yield on the 13 percent note due August 2010, which is more sensitive to interest rate expectations, rose 3 basis points to 10.58 percent. Yields move inversely to bond prices.

``The longer end of the yield curve is flattening out because the market is forward looking,'' said Leon Myburgh, African strategist at Citigroup Inc. in Johannesburg. ``A stronger rand and weaker oil price makes for a better long-term inflation outlook.''

Crude oil fell 0.6 percent to $121.44 a barrel, taking it's decline from a record of $147.27 a barrel on July 11 to 16.3 percent.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.netCarli Lourens in Johannesburg at clourens@bloomberg.net