Robert Brand

The rand, on course for its first monthly gain in three, is set to climb further as the prospect of more interest rate increases amid the lowest volatility in almost 13 years lures foreign buyers.

The rand has strengthened 1.1 percent since the end of last month, the most among 16 major currencies tracked, fuelled partly by investors borrowing in dollars to purchase South African assets. The advance has helped drive a 2.9 percent return for local bonds this month, the best performance of 16 Bloomberg emerging market indices.

Reserve Bank governor Gill Marcus lifted the repo rate by 25 basis points on July 17 and warned of more increases.

Policymakers are struggling to tame inflation, while limiting the damage higher borrowing costs risk inflicting on the slowing economy. Higher rates are increasing rand returns relative to peers amid sustained appetite for emerging market assets as volatility falls.

“Investors are quite happy to sit on those long-rand positions at the moment,” Ion de Vleeschauwer, the chief trader at Bidvest Bank, said on Friday.

“Volatility can’t stay at these levels indefinitely, but there isn’t anything that looks like it’s going to upset things in the short term.”

The rand’s three-month implied volatility against the dollar fell to 10.05 percent last week, the lowest since September 2001, according to data. A measure of price swings in developing nation currencies fell to a record, according to JPMorgan Chase indices.

The rand carry trade has returned 1.55 percent this month, the most among major currencies. South African 10-year yields are the sixth-highest among 24 emerging markets.

One-year interest rate swaps, used to lock in borrowing costs, are signalling another 50 basis points of increases over the next 12 months. Mohammed Nalla, the head of strategic research at Nedbank Group, said that was boosting the rand’s appeal relative to peers.

“We’re in a tightening cycle,” Nalla said on Friday. “On a relative basis, the carry on the rand is looking attractive. You just need currency stability and the guys will come for the yield pick-up.”

The rand might appreciate to R10.20 a dollar before the rally ran out of steam, Nalla estimated. The currency weakened by 5.97c to be bid at R10.5536 a dollar at 5pm.

An increase in US treasury yields might end the bond rally, undermining rand gains, Rand Merchant Bank economist Carmen Nel said in a note on Friday. If the US economy continued to improve, “upward pressure on US yields could persist”, Nel said. “That would make it harder for the rand to hold on to its recent gains and push local bond yields higher.”

The currency is likely to weaken to R10.75 to the dollar by year-end, according to the median estimate of 27 analysts surveyed. – Bloomberg