South Africa’s R50 note depicts a lion and the world’s current best performing currency has certainly been roaring like the king of the beasts lately.
While the short-term outlook remains bullish, the rand could become a victim of its own might if, as expected, domestic interest rates start to come down next year and global rates go up, reducing the appeal of South Africa’s high yielding assets.
”Our deposit rates are attractive, especially to foreigners, as locals are not getting the same value because of inflation,” said MMS markets analyst George Glynos.
”But if our rates come down next year and if some other rates go up, the differentials will get narrowed and foreigners will not find the same value for their money and will leave. That will not be rand positive,” he said.
The rand maintained its red-hot rally on Tuesday, gaining 12 cents on the day at one point to 9,16 per dollar, its best level in almost 14 months, which extended its gains in 2002 to over 30%.
Analysts have attributed much of this rally to rates.
The rand’s slide last year stoked inflation, with the central bank’s targeted measure for consumer inflation, CPIX, hitting 12,5% in the year to October
— the 12th consecutive month it has missed its three to six percent target.
The central bank has responded by raising interest rates by 400 basis points in the year to date, bringing its key repo rate to 13,5% and prime lending rates to 17%.
But the rand’s strength — provided oil prices don’t soar — is seen eventually halting inflation in its tracks, and the central bank is expected to sit tight on rates at its monetary policy committee meeting on Wednesday and Thursday.
Many analysts believe rates will start falling by the middle of next year, which could take the shine off the currency.
But the short-term outlook is positive.
Analysts say that it is within striking distance of 9,0 per dollar and could easily get there next week. Glynos said he expects it will reach 8,90 per dollar in the next couple of weeks.
”I think we will see it get close to 9,0 per dollar before the end of the year but it may retrace a bit before then and then build up steam again for another spurt,” said Gensec Bank analyst Jacques Potgieter.
With three percent economic growth, South Africa is doing well by global standards, despite its potentially growth-stifling rates, and this is helping to draw capital.
The rand is the world’s best performing currency against the dollar in the year to date, leaving the second-place Norwegian crown — up around 21% against the dollar — in the dust.
If things don’t suddenly fall apart, it will be the first time since 1990 that the rand has finished the calendar year firmer than it started.
South Africa’s currency has now clawed back much of the ground it lost when it plunged 37% in 2001.
But that alone should give investors pause for caution, as the world’s top currency has also been one of its most volatile.
This is partly explained by its unusual status.
It is lumped in the broad category of emerging economies but has sophisticated and liquid markets, making it easy for capital to flow in and out with the tides of the financial world.
A glance at the charts shows the rand has been down this road before, though the road is getting more extreme.
In 1998 it slid from 4,86 to 6,84 per dollar by August of that year — then an historic low — and then clawed back about 16% of its value to end the year at 5,88/dlr.
On the R200 note you will find a picture of a leopard. And this one has been known to change its spots. – Reuters