Rand breaks below R7 a dollar as rate hikes kick in
July 3, 2007
By Ethel Hazelhurst
Johannesburg - The rand exchange rate firmed below R7 a dollar yesterday for the first time since May 17 to a bid price of $6.9566 at 5pm.
"The improvement came as offshore banks sold dollars," said Ian Cruickshanks, the head of Nedbank Capital's strategic research unit.
According to Bloomberg, the dollar dropped to its lowest level in almost a month. However, the rand's move was not just a reflection of dollar weakness. The local unit edged up against the euro, from R9.488 to R9.477, and the pound, from R14.0893 to R14.0036.
"We have broken a few support levels," said Jimmy Bryson, a Rand Merchant Bank currency trader. "All the emerging markets are doing well at the moment."
The rand has been firming gradually since June 8, when it was nearly R7.30 to the dollar, R9.70 to the euro and about R14.30 to the pound. The improvement followed the decision by the Reserve Bank's monetary policy committee to push its official repo rate 0.5 percentage points to 9.5 percent on June 7.
Theoretically, there is a strong correlation between moves in interest rates and currencies because higher yields tempt offshore investors into interest-bearing securities.
In practice, however, the relationship is not constant because higher interest rates, which raise the cost of borrowing, can have an adverse effect on stock markets.
South Africa's experience is that foreign investors may respond more to the potential for rising stock prices than to a rise in interest rates.
However, the recent improvement in the rand indicates that interest rates and the currency have resumed the more conventional relationship.
"With rates going up, we will be a good carry play," said Bryson. Carry trade is the practice of borrowing in countries, such as Japan, with low interest rates, and investing the proceeds in relatively high-yielding currencies such as the rand.
The central bank has already raised its repo rate 2.5 percentage points from 7 percent since last June. And following poor inflation data released last week, expectations of further interest rate increases are rising. Consumer inflation minus mortgage costs has breached the ceiling of the bank's 3 percent to 6 percent target range for two months in a row.
After strengthening to about R7.15 a dollar late last week, the rand rose further. Reuters cited data that showed a smaller-than-expected trade deficit on Friday. The deficit narrowed to R2.7 billion in May, below market expectations of a R4.7 billion shortfall.
And support came yesterday from the gold price, Cruickshanks said. "It started the day at $649 an ounce and rose to $656."
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