Bloomberg News

Rand Gains for Fourth Day on Recovery Bets, Higher-Yield Trade

September 28, 2011

Sept. 28 (Bloomberg) -- The rand extended its rally against the dollar to a fourth day, reversing earlier losses, after a report showed U.S. capital goods orders rose the most in three months, boosting speculation demand for South Africa’s commodity exports will pick up.

“The ‘global growth’ currencies, and the rand is one of them, are outperforming today,” Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said by e-mail in response to questions by Bloomberg.

The rand advanced 0.2 percent to 7.8442 per dollar at 4:39 p.m. in Johannesburg, after weakening as much as 0.8 percent. Against the euro, South Africa’s currency climbed 0.2 percent to 10.6635.

American orders for goods like computers and communications gear, excluding military hardware and aircraft, climbed in August, a sign business investment is supporting the recovery. Speculation policy makers worldwide will keep borrowing costs on hold and that Greece will avert a default helped support demand for the currency.

The European Central Bank will leave borrowing costs on hold at least for the remainder of 2011 amid a sovereign debt crisis that’s threatening to push the 17-nation euro region into recession, according to a Bloomberg survey of economists. The Federal Reserve has pledged to keep its benchmark lending rate near zero for an extended time, and started moving $400 million of Treasury holdings into longer-dated bonds to push down long- term interest rates.

“A benign interest-rate environment in developed markets for a longer period of time” should “benefit the rand as liquidity will be channeled toward high-yielding economies,” John Cairns and Nema Ramkhelawan-Bhana, currency strategists at Rand Merchant Bank in Johannesburg, said in a research note.

Net Buyers

The extra yield investors receive for buying South African 10-year debt over U.S. Treasuries was 6.14 percentage points today. The spread has narrowed from a record 6.53 percentage points on Sept. 22. Foreign investors were net buyers of 41.5 billion rand ($5.3 billion) of South African bonds this year, according to the JSE. Ltd.

The rand’s gain tracked the euro’s advance to a one-week high against the dollar as European leaders signaled they will do what is necessary to aid debt-stricken nations including Greece. The EU proposed a financial-transactions tax to take effect in 2014 and Finland’s parliament approved an expansion to the region’s rescue fund.

Room for Optimism

“There is still some room to be optimistic in the short to medium term that an outright default event can be avoided,” Tradition Analytics researchers led by Johannesburg-based Quinten Bertenshaw said in a research note. “The markets are becoming a little more inclined to price this in.”

The International Monetary Fund cut its 2011 growth estimate for the global economy on Sept. 20 to 4 percent from 4.3 percent, and reduced the forecast for 2012 to 4 percent from 4.5 percent. The Washington-based lender predicted “severe” fallout should Europe fail to contain the debt crisis.

Declines in emerging-market currencies are overdone and they may recover as risk appetite improves, South African reserve Bank Governor Gill Marcus said in an opinion article published in Johannesburg-based Financial Mail today.

The rand’s advance helps keep prices on imported goods in check, giving the central bank more leeway to cut interest rates to bolster Africa’s biggest economy.

The 13.5 percent bonds due 2015 climbed 12 cents to 122.61 rand, driving the yield down four basis points, or 0.04 percentage point, to 6.87 percent, the lowest since Sept. 21.

“A sustained stabilization in the currency will likely prompt a 50-basis-points cut by the Reserve Bank in their last meeting of the year” in November BNP Paribas SA analysts led by London-based Bartosz Pawlowksi wrote in an e-mailed comment.

Forward-rate agreements starting after the November policy meeting dropped to one basis point to 5.3 percent today, a record low, as investors bet on an increased chance of a rate cut this year.

--Editors: Stephen Kirkland, Linda Shen

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


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