The rand is likely to strengthen almost 3 percent by month-end as foreign investors continue buying the country’s assets to benefit from their yield advantage over industrialized nations, said Rand Merchant Bank.
South Africa’s currency may appreciate to 6.90 per dollar “in the next two weeks,” Brigid Taylor, a Johannesburg-based currency analyst at RMB, the investment banking arm of FirstRand Ltd., South Africa’s second-biggest financial services company, said in an interview in the city today.
“There’s very little that will stop foreign investors from chasing South African yield,” said Taylor. “South Africa still offers one of the highest real carry returns around.”
The rand traded 0.2 percent weaker at 7.1044 per dollar by 12:26 p.m. in Johannesburg, from a previous close of 7.0932.
The currency of Africa’s biggest economy has surged almost 33 percent versus the dollar since the start of last year as near zero interest rates in developed countries encouraged investors to borrow cheaply and invest in higher-return markets. The transactions, known as carry trades, have swelled net foreign purchases of South African assets to 101.5 billion rand ($14.3 billion) this year, according to the JSE Ltd., the company that runs the country’s exchanges.
South Africa’s 6 percent benchmark rate compares with deposit returns of 0.1 percent in Japan, 0.25 percent in the U.S. and 0.5 percent in the U.K. The interest rate differential has given the rand the second-best carry-trade return against the dollar after Brazil’s real since the start of last year.
The carry trade, which has caused the rand to strengthen, is a “global problem,” South African Finance Minister Pravin Gordhan, said in an interview in London today. The country is considering options to stem rand appreciation, he added.
“Foreigners are buying South African long-end bonds almost every day,” said Taylor. “The stock market’s also attracting inflows.”
The yield on South Africa’s 10.5 percent bond due December 2026 has slumped 125 basis points this year to 7.80 percent, still higher than the 2.715 percent available on 10-year U.S. Treasuries. The benchmark FTSE/JSE Africa All Share Index has gained 2.7 percent this year, extending its advance since the start of last year to almost 22 percent.