Data released yesterday confirmed that South Africa’s central bank intervened “aggressively” in the currency market last month, according to Ian Cruickshanks, the head of strategic research at Nedbank Capital. The Reserve Bank reported that its net foreign exchange reserves rose $1.1 billion (R7.9bn) in the month to $44.45bn.
The bank and National Treasury have made a concerted attempt over the past 18 months to cap the currency’s gains by selling rand and buying other currencies.
But the domestic unit was buoyed by foreign investment flows, which made it the third-strongest major currency last year, said Rian le Roux, the chief economist at Old Mutual Investment Group South Africa.
However, the investment tide is turning and non residents sold a net R6.2bn in bonds and R1.1bn in equities last month, according to the Reserve Bank. Against this backdrop the bank’s own rand sales helped weaken the currency from R6.6 to the dollar on January 3 to R7.2 on the last day of the month.
Cruickshanks said the bank had moved when it knew its actions would be most effective.
Jeff Gable, the head of macro and fixed income research at Absa Capital, said the only currency that did worse last month was the Suriname dollar. which weakened nearly 17 percent against the dollar. The Swazi lilangeni and the Lesotho loti fell 8.3 percent, in line with the rand’s decline. The rand was bid at R7.2463 to the dollar at 5pm yesterday.
Jean Francois Mercier, the South Africa economist at Citi, said the rand’s weakness could reduce the need for costly currency intervention.
In the financial year that ended in March 2010, the Reserve Bank lost more than R1bn due to its activities in the currency market.
Reserve Bank governor Gill Marcus said in a speech last week that the bank and Treasury had accumulated $7.4bn worth of foreign exchange in calendar 2010.
However, Mercier pointed out foreign exchange reserves “remain relatively low by global standards” so the bank would continue to buy “foreign exchange in an opportunistic way whenever inflows strengthen the rand”.
A weaker rand will put upward pressure on prices. The impact has already been seen in the petrol price, which gained 26c a litre both this month and last month.
The petrol price is set each month in line with moves in international prices.
The underrecovery is currently running at 38c a litre so motorists could be heading for an increase of this order next month. The higher petrol prices will have a domino effect through the economy, pushing up other prices.
With inflation rising, interest rates are likely to rise sooner than previously expected. Mercier said there was a “meaningful risk of a rate hike as early as the third quarter”.
Le Roux said one of the reasons the rand was losing its attractions was that rates in some emerging markets were rising.
This was diverting funds that previously flowed to South Africa. He predicted the exchange rate would be at R7.50 a dollar by year-end. - Ethel Hazelhurst