Interest-rate hikes locally are likely to make for a more stable rand going into the next year, analysts say.
The carry trade, which involves borrowing in low yielding currencies and investing in high yielders, is expected to help the rand offset the negative effect that the imports need for South Africa’s increased infrastructural spending will have.
South Africa’s 50 basis-point interest-rate hike on December 7 was preceded by three others in June, August and October. At least one more rate increase is expected in the current cycle.
Over the course of 2006, the rand has gone from trading below R6 per dollar in April to just below R8 per dollar in early October, which was its weakest since mid-2003. It is currently hovering just above the R7 per dollar level.
“Given that rates are set to rise even further, domestic factors stand the rand in good stead. One might find the rand at least initially benefiting from a generally weaker dollar and higher rates domestically,” ETM market analyst George Glynos said on Tuesday.
“The carry trade is important especially if the United States economy starts slowing and guys talk more convincingly about rate cuts in US.”
He believes that the rand will probably take the bulk of its direction from developments in the dollar rather than local factors.
Glynos expects the rand to trade anywhere from R6,80 to R7,50 per dollar in the first three to four months of the next year. The carry trade will contribute to a more stable rand, he asserted.
Infrastructural spending related to the 2010 World Cup, Gautrain and other projects will require imports and keep the trade balance under pressure. However, the carry trade and weaker dollar will help counteract this to an extent.
“I think the rand will be more stable next year because it is already undervalued and it is easier to stabilise an undervalued currency,” argued Efficient Group chief economist Dawie Roodt. “Also, it is an interest-rate thing — higher rates will go some way to stabilise the currency.”
Roodt expects the rand to be stable to stronger early in 2007 before weakening towards the end of the year. “We will probably have the rand below R7 [to the dollar] in the next few months and in the second half it will probably be above R7. But we are not talking major movements.”
T-Sec economist Mike Schussler expects the rand to be relatively strong in the first half of the year due to private equity inflows into South Africa. This will see it trade at R7 to R7,25 to the dollar, or maybe even below.
However, as local interest rates reach their peak, he expects the rand to weaken to R7,75 to R8 toward the end of the year.
“I think there is 25 to 30 cents in rand, both against euro and the dollar, that is there because of people expecting private equity inflows. No one wants to be caught short in the short term,” Schussler concluded.
Private equity deals already in the pipeline included those involving Edcon, Alexander Forbes and Shoprite, although the latter appears to be mainly local in nature. — I-Net Bridge