South Africa Rand World's Second-Best Currency in July on Yield

By Garth Theunissen

July 31 (Bloomberg) -- South Africa's rand surged this month, the second-best performing currency in the world against the dollar and euro, on speculation accelerating inflation will spur the central bank to lift interest rates.

The rand jumped 5.9 percent against the U.S. currency and 6.9 percent versus the euro, the first monthly gains in three against both, as interest rates at the highest level in more than five years encouraged so-called carry trades. Producer-price inflation rose at the fastest pace in 19 years last month, suggesting the central bank may need to keep boosting borrowing costs.

``The broad theme for the rand is the return toward the carry trade across the emerging-market universe,'' said Shahin Vallee, an emerging-market currency strategist in London at BNP Paribas SA, France's largest bank.

The rand rose 0.1 percent to 7.3823 per dollar at 12:31 p.m. in Johannesburg, from 7.8194 at the end of June. The currency climbed to near a six-month high of 7.3516 per dollar yesterday. Against the euro, the rand gained 0.1 percent to 11.5285, from 12.3190 at the end of last month.

Inflation quickened to an annual 11.6 percent rate in June, the 15th consecutive month it has exceeded the central bank's 3 percent-to-6 percent target, Statistics South Africa said yesterday. Producer-price inflation accelerated to 16.8 percent from 16.4 percent in May, the government agency said today.

Carry Trades

South Africa's currency has gained 10 percent against the dollar since June 12, when the central bank raised interest rates a half-point to 12 percent. It has offered the best carry-trade return against the U.S. currency, euro and yen over that time, according to data compiled by Bloomberg.

In carry trades, investors borrow lower-yielding currencies such as the Swiss franc to buy higher-yielding assets, such as those denominated in rand, typically sending the target higher and earning the spread between the two. Traders take the risk currency moves will erase the profit. When carry trades diminish, investors would sell the rand to repurchase so-called safe-haven assets.

The Colombian peso was the world's top-performer in July, gaining 6.5 percent against the dollar and 7.5 percent versus the shared European currency.

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