South Africa's Rand Declines Against Dollar for a Second Day

By Garth Theunissen

Aug. 25 (Bloomberg) -- South Africa's rand weakened against the dollar and bonds fell before a report that will probably show inflation in the continent's biggest economy exceeded the central bank's ceiling for a 15th month.

The rand fell for a second day and benchmark two-year bonds declined for a fifth session on bets consumer-price growth, excluding 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. Pretoria-based Statistics South Africa will publish the data on Aug. 27.

``The rand and bonds are trading a touch weaker as traders square-off their positions before the inflation data,'' said Victor Mphaphuli, a portfolio manager who helps oversee about $45 billion at Stanlib Asset Management in Johannesburg. ``Inflation is nearing a peak but there's an outside chance of a nasty number, which would have a negative impact on the market in the short term.''

The rand fell as much as 0.9 percent to 7.7453 per dollar and was at 7.7180 by 2:25 p.m. in Johannesburg, from 7.6776 on Aug. 22. It weakened versus all but one of 16 major currencies monitored by Bloomberg, losing 0.4 percent to 11.3977 per euro.

``Guys are staying long dollar, short rand and are waiting to see what the inflation numbers are going to look like,'' said Marc Copeland, a currency trader at Investec Asset Management in Cape Town. A long position is a bet an asset will strengthen.

`Rand Struggling'

The rand's ``struggling to fight a stronger dollar, and we should see more rand weakness this week.'' It may fall to about 7.80 per dollar by the end of the week, Copeland predicted.

The yield on South Africa's 13 percent note due August 2010, which is more sensitive to interest rates, climbed 4 basis points to 9.91 percent. The price of the bond dropped six cents per 100- rand face amount to 105.53. The yield on the benchmark 13.5 percent security due September 2015 added 2 basis points to 9.28 percent. Yields move inversely to bond prices.

The South African Reserve Bank has raised its key interest rate 10 times since June 2006 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 as consumer spending slowed and oil prices fell, easing pressure on prices.

South Africa's relatively high interest rates make the rand a popular purchase 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 two, taking the risk currency moves will erase their profit.

`Tricky Stage'

South Africa's 12 percent main interest rate compares with borrowing costs of 0.5 percent in Japan and 2 percent in the U.S.

``The carry trade is at a tricky stage, as far as the rand is concerned,'' said Mphaphuli. ``If rates are hiked again it may benefit the currency in the short term but in the long term it will hurt the rand because of the negative impact high rates have on the economy.''

The rand also fell as the prices of gold and platinum, South Africa's biggest export earners, slipped for a second day as a stronger U.S. dollar eroded the appeal of the metals as alternative investments.

Gold, which is priced in dollars and often moves in the opposite direction to the U.S. currency, declined as much as 0.7 percent to $817.58 an ounce. Platinum fell 1.2 percent to $1,418 an ounce. South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.

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