Bloomberg News

Rand Gains to Dollar as Central Bank Reduces Currency Purchases

June 07, 2011

June 7 (Bloomberg) -- The rand strengthened against the dollar, reversing its biggest decline in two weeks, after the central bank’s foreign currency and gold reserves fell in May and on reduced purchases.

The rand advanced as much as 0.7 percent to 6.7198 per dollar and traded 0.6 percent stronger at 6.7220 at 4:18 p.m. in Johannesburg. Earlier, the currency weakened as much as 1.1 percent to 6.8392 per dollar. It gained 0.1 percent to 9.8643 per euro.

Gross gold and foreign currency reserves declined to $50.1 billion from $50.6 billion in April, the Pretoria-based Reserve Bank said on its website today. Net reserves fell to $45.9 billion from $46 billion. The figures indicate the bank bought about $217 million dollars in May, less than the $555 million it purchased in April, according to Standard Bank Group Ltd.

“The numbers suggest that after a period of aggressive intervention, the authorities are doing less to combat rand strength,” John Cairns and Nema Ramkhelawan, currency strategists at Rand Merchant Bank in Johannesburg, said in a research note. “The bottom line is that the authorities can’t do much about the currency even if they wanted to.”

Finance Minister Pravin Gordhan said today South Africa can’t counter currency appreciation on its own, though it would continue to accumulate reserves “to the extent that affordability allows.” He was responding to comments yesterday by Trade and Industry Minister Rob Davies, who said the rand is overvalued and the government is considering ways of limiting currency strength.

Greek Debt Rollover

The rand extended gains, following the euro stronger, after the European Central Bank signaled its approval of Greek bond rollovers and German Chancellor Angela Merkel told U.S. President Barack Obama the region will overcome its debt crisis.

The rand often tracks the euro, the currency of most of South Africa’s trade, with a statistical correlation of 0.83 in the past month. A value of 1 would mean they moved in lock step.

“We should see some slight rand recovery this morning on the back of the euro-dollar, which remains the key intraday indicator to watch,” Cairns and Ramkhelawan wrote.

Bonds advanced after a weekly debt sale where South African government borrowing costs fell to a seven-month low as investors raised bets the central bank won’t increase rates soon to slow price advances in Africa’s biggest economy.

Bond Sale

The Pretoria-based Reserve Bank sold 1.4 billion rand ($207 million) of bonds maturing in 2026 at an average yield of 8.4 percent, it said on its Bloomberg page. The yield was the lowest since the auction of Nov. 2 and 27 basis points, or 0.27 percentage point, lower than at the previous auction of the debt on May 3. In the secondary market, the bonds climbed 0.8 percent to 118.29 rand, lowering the yield 10 basis points, or 0.1 percentage point, to 8.38 percent.

The central bank also sold 700 million rand of notes due in 2020 at an average yield of 8.19 percent, the lowest since Nov. 9 and 11 basis points lower than at the previous auction on May 24. The debt climbed in the secondary market, reducing the yield 10 basis points to 8.14 percent.Investors bid for 1.8 times the amount on offer.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Robert Brand in Cape Town Nef at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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