South Africa Rand Falls to One-Week Low Before Inflation Report

By Garth Theunissen

Aug. 26 (Bloomberg) -- South Africa's rand fell for a third day against the dollar before a government report that may show inflation in the continent's biggest economy exceeded the central bank's ceiling for a 15th month.

The rand slipped to its weakest level in a week before Statistics South Africa releases its consumer-price data tomorrow. CPIX inflation, which excludes mortgage costs, quickened to 12.9 percent in July, from 11.6 percent a month earlier, according to the median estimate of 20 economists surveyed by Bloomberg News. That would be the fastest rate of price growth since CPIX records began in 1998.

``In a stronger dollar environment the rand is trading weaker against the U.S. currency, particularly ahead of the inflation data tomorrow,'' said Kay Muller, a currency researcher at Rand Merchant Bank in Johannesburg. ``Traders are waiting to see if there's a big move in inflation before taking a clear position in the currency.''

The rand dropped as much as 0.9 percent to 7.8330 per dollar, its lowest level since Aug. 19, and was at 7.8292 by 12:10 p.m. in Johannesburg, from 7.7635 yesterday.

``Inflation is expected to have catapulted to fresh record highs last month,'' Michael Keenan, a currency strategist at Standard Bank Group Ltd. in Johannesburg, wrote in a client note today. There is a ``risk of another surprise figure,'' he said.

South Africa's currency rose against the euro, adding 0.1 percent to 11.4389. It also strengthened versus half of the 16 most-actively traded currencies monitored by Bloomberg, rising most against the New Zealand and Australian dollars.

Inflation Risk

``The risk of a really high inflation number tomorrow increases concerns of further interest-rate hikes,'' said Muller. ``That could help the rand in the short term, but fundamental weakness in the South African economy suggests there will be a tendency for the rand to weaken in the long term.''

Rand Merchant Bank predicts the rand will fall to 8.50 per dollar by year-end, more bearish than all but two of the 20 currency forecasts in a Bloomberg survey.

The South African Reserve Bank has raised its key interest rate 10 times since June 2006 in a bid to quell inflation, which has exceeded its 6 percent ceiling since April 2007. The bank's monetary policy committee kept interest rates on hold at its meeting Aug. 14.

The country's 12 percent main rate, the highest in more than five years, makes the rand a favorite in so-called carry trades. In such transactions, investors borrow a currency at a low interest rate and invest the proceeds in markets where returns on assets are higher. Investors earn the spread between the cost of borrowing and the returns on their investment, taking the risk currency moves will erase their profit.

South Africa's main interest rate is 1,150 basis points above Japan's and 925 basis points higher than Switzerland's.

Government bonds fell, with the yield on the 13 percent note maturing in August 2010, which is more sensitive to interest-rate expectations, climbing 4 basis points to 9.92 percent. The yield on the 13.5 percent security due September 2015 gained 2 basis points to 9.28 percent. Yields move inversely to bond prices.

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