Rand Rises Against Dollar on Prospects for South African Rates

By Garth Theunissen

Dec. 20 (Bloomberg) -- The rand rose against the dollar for a second week after the U.S. Federal Reserve cut interest rates to almost zero and on speculation South Africa’s central bank will lower borrowing costs to stimulate its economy.

The rand appreciated 3.9 percent against the U.S. currency this week to trade at 9.7200 per dollar as of 4 p.m. in Johannesburg yesterday, compared with 10.1184 on Dec. 12.

The dollar was poised for its biggest weekly loss against the euro since the 15-nation currency’s 1999 debut as the Fed’s rate cut reduced the appeal of U.S. assets and enhanced the relative returns of those in emerging markets. The rand was also buoyed by data that showed South Africa’s inflation rate slowing, giving the central bank more room to continue cutting rates next year to support growth in the $278 billion economy.

“The rand is being driven mainly by a weaker dollar, which is on the back foot following the aggressive U.S. rate cuts,” said Brigid Taylor, a senior currency trader at Rand Merchant Bank in Johannesburg. “It’s also being rewarded for the more benign domestic inflation- and interest-rate outlook, which is positive for economic growth prospects. It’s all about growth now.”

The rand also strengthened against 10 of the 16 most- actively traded currencies monitored by Bloomberg this week, advancing most against the Norwegian krone. Against the euro it slipped 0.3 percent to 13.5728, from 13.5460 on Dec. 12.

South Africa’s currency could rally to 9.10 per dollar next week if it breaks below 9.50, Taylor said.

Inflation Slows

“The rand is in a consolidation phase which reflects the weakness in the dollar,” said Elisabeth Gruie, an emerging- markets currency strategist in London at BNP Paribas SA, France’s biggest bank. “Liquidity is very thin at the moment so the falling dollar is the big driver for the rand.” The rand may head toward 9.30 per dollar next week, Gruie added.

Consumer-price inflation in South Africa slowed for a third consecutive month in November, easing to 12.1 percent, Pretoria- based Statistics South Africa said on Dec. 17. Producer inflation decreased to 12.6 percent in November, the slowest pace in seven months, the statistics office said this week.

“The decline in inflation gives the central bank room to cut rates, which would be very positive for the economy,” said Marc Copeland, a currency trader at Investec Asset Management in Cape Town, which oversees around $60 billion dollars in assets.

The South African Reserve Bank, led by Governor Tito Mboweni, lowered its repurchase rate by a half point on Dec. 11, the first cut in borrowing costs since April 2005. Inflation is expected to “radically come down” next year, dropping into the 3 percent to 6 percent target range by the third quarter, central bank Governor Tito Mboweni said on the same day.

Government bonds advanced in the week, with the yield on the benchmark 13.5 percent security due September 2015 declining 55 basis points to 7.12 percent. The price of the bond, which moves inversely to the yield, added 3.38 rand per 100-rand face amount, to 133.60 rand. The yield on the 13 percent note maturing in August 2010, slipped 58 basis points to 7.21 percent. Its price gained 89 cents per 100-rand face amount to 109.03 rand. Yields move inversely to bond prices.

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