The rand climbed to its strongest level against the dollar in more than five weeks as monetary easing from Japan to the U.S. sparked demand for high-yielding assets including South African bonds.
The currency of Africa’s biggest economy appreciated as much as 0.8 percent to 8.9188 per dollar, the highest on an intraday basis since Feb. 28, according to data compiled by Bloomberg. It traded 0.6 percent stronger at 8.9328 by 4:54 p.m. in Johannesburg. The rand’s 1.9 percent gain in the past two days is the best performance out 25 emerging-market currencies monitored by Bloomberg.
It’s too soon to say whether the appreciation in the past week will affect the country’s inflation outlook, Rashad Cassim, head of research at the Pretoria-based South African Reserve Bank, said at a Thomson Reuters Corp. event in Johannesburg today. The currency’s effect on oil and food prices plays a “critical” factor in monetary-policy decisions, he said.
Yields on benchmark 10.5 percent bonds due December 2026 have dropped 36 basis points over the past five days and rose for the first time since March 27, adding 3 basis points, or 0.03 percentage point, to 7.04 percent today.
“The market seems to be quite adamant that central banks globally, especially the Fed, will keep doing quantitative easing throughout the northern-hemisphere summer,” Ion de Vleeschauwer, the Johannesburg-based chief dealer at Bidvest Bank, said by phone. “People have decided it’s time to take some risk onto the books, time to search for some additional yield.”
Foreign investors bought a net 1.9 billion rand ($212 million) of South African bonds yesterday, adding to 5.4 billion rand of purchases last week, the most since November, according to JSE Ltd. data.
The rand may advance to 8.85 per dollar, a significant support level for the U.S. currency, in coming days, De Vleeschauwer said. Support and resistance levels are where traders cluster orders to buy or sell a currency.
The Bank of Japan said last week it will buy more longer-term government bonds than forecast as part of its asset-purchase program. European Central Bank President Mario Draghi said monetary policy will remain accommodative, while the Bank of England said it will continue buying assets. Federal Reserve Chairman Ben S. Bernanke may push on with $85 billion in monthly bond purchases through summer in the northern hemisphere as sluggish jobs data add to evidence of slower growth.
Investors receive 479 basis points of extra yield for holding South African 10-year bonds rather than U.S. Treasuries. The premium has narrowed 16 basis points over the past week, according to data compiled by Bloomberg.
In the same period, the rand strengthened the most since July 2012, easing concern that inflation will breach the top end of the central bank’s target earlier than forecast. The rand has climbed 3.2 percent in the past five days against the dollar, paring the loss this year to 5.5 percent.
Inflation quickened to 5.9 percent in February, close to the top end of the bank’s 3 percent to 6 percent target. The inflation rate rises as much as 0.2 percentage point for each 1 percentage-point decline in the rand, according to Standard Bank Group Ltd.
The rand is “one of the most volatile measures in the world,” said Cassim, who is a member of the central bank’s Monetary Policy Committee.
Forward-rate agreements starting in a year have dropped 15 basis points in the past year to 5.15 percent, compared with the three-month Johannesburg Interbank Agreed Rate of 5.13 percent. The contracts imply that traders don’t expect the central bank to raise its benchmark repo rate over the next year.