Rand May Gain to Highest Since 2005 on U.S. Stimulus, RMB Says
May 03, 2011, 11:10 AM EDTBy Robert Brand
May 3 (Bloomberg) -- South Africa’s rand may gain to the strongest since 2005 to the dollar by the end of next year if the U.S. Federal Reserve maintains its record stimulus to boost the world’s biggest economy, according to Rand Merchant Bank.
“Muted demand coupled with sluggish employment gains might well keep the Fed on hold well into 2012,” taking the rand to 5.80 per dollar, Rand Merchant Bank analysts Theuns de Wet and Nema Ramkhelawan said in a research note. “If the Fed continues to use monetary expansion, we could see the dollar trade well below” 6 rand by the end of 2012, they wrote. The rand last traded below 5.80 per dollar in March 2005.
The South African currency appreciated to a 3 1/2-year high of 6.5437 per dollar yesterday after the Fed last week held interest rates near zero and Chairman Ben S. Bernanke said the central bank will continue reinvesting its securities holdings when they mature even after its $600 billion bond-buying program ends in June.
The U.S.’s benchmark rate of 0.25 percent compares with 5.5 percent in South Africa, making the rand attractive in carry trades, where investors borrow in the currency of a nation with low interest rates to use the proceeds for purchasing assets where returns are higher.
Rand Merchant Bank, a unit of South Africa’s second-biggest lender, estimates a current “fair value” for the rand of 6.55 per dollar, Johannesburg-based De Wet and Ramkhelawan wrote. The currency traded at 6.636 per dollar at 3:35 p.m. in Johannesburg.
If the Fed maintains its monetary easing and increases money supply at 8 percent annually, higher than the historical average of 5.5 percent, commodity prices would rise, supporting the currencies of commodity exporters including South Africa, De Wet and Ramkhelawan wrote.
“Under these assumptions, our regression model suggests the dollar will be at 5.80 rand by the end of 2012,” they wrote. If the Fed restricts the money supply to 5.5 percent, the rand will likely weaken to 7 per dollar, they estimated.
--Editors: Ana Monteiro, Alexander Nicholson.
To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net
To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net
