South African Rand Rises Against Dollar, Snapping Two-Day Slide

By Garth Theunissen

July 25 (Bloomberg) -- South Africa's rand strengthened against the dollar for the first day in three on speculation interest rates at a 5 1/2-year high are stoking demand for the currency in so-called carry trades.

The currency was poised for a sixth-weekly advance as prices for gold and platinum, the nation's biggest exports, rose. The rand offered the best carry-trade return of its 16 most-actively traded counterparts monitored by Bloomberg today. It was one of only four currencies to provide a positive return against the Swiss franc, often used for carry trades.

``South Africa's high interest rates are helping the rand from two angles,'' said George Glynos, the managing director in Johannesburg of Econometrix Treasury Management, which advises clients on bond and foreign-exchange transactions. ``On the one hand they boost carry-trade purchases, but they also make it very expensive to speculate against the rand.''

The currency rose as much as 1.6 percent to 7.5678 per dollar and traded at 7.5898 by 12:52 p.m. in Johannesburg, from 7.6873 yesterday and 7.6047 at the end of last week. Investors should sell the rand at about 7.60 per dollar and buy back at about 7.72, Glynos said.

The rand has climbed 7.4 percent since June 12, when the central bank raised the benchmark interest rate by a half-point to 12 percent, the highest level since June 2003, when it was at 13.5 percent. Since the latest increase in borrowing costs, the currency has offered the best carry-trade return against the dollar, euro and yen over that period.

Interest-Rate `Protection'

``The rand is outperforming other high-yielding currencies at the moment,'' said Robert Beange, an emerging-market currency strategist at JPMorgan Chase & Co. in London. ``High interest rates do offer it some protection.''

When carry-trade appetite picks up, traders borrow lower- yielding currencies such as the franc to buy higher-yielding assets, such as those denominated in rand, sending it higher. Conversely, when carry trades decrease, investors would sell the rand to repurchase so-called safe-haven assets, including the franc.

South Africa's interest rates compare with borrowing costs of 0.5 percent in Japan and 2.75 percent in Switzerland.

The South African Reserve Bank, led by Governor Tito Mboweni, has increased the key rate 10 times since June 2006 to curb inflation that has exceeded its 3 percent to 6 percent target range for 14 straight months. Price growth quickened to an annual 10.9 percent in May, the fastest pace since November 2002.

Monetary policy will have to ``tighten at a global level,'' Mboweni said yesterday in an interview with CNBC Africa, adding that he didn't know the magnitude of the increases that would be required.

The rand is the worst performer of the 16 most-traded currencies tracked by Bloomberg this year, falling almost 10 percent versus the dollar and more than 16 percent against the euro.

South African government bonds gained for a fourth day, with the yield on the benchmark 13.5 percent security due September 2015 falling 3 basis points to 9.68 percent. The yield lost 21 basis points this week. Yields move inversely to bond prices.

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