The rand is having its best run in months, and the surprising part is how little of it was made in South Africa. On Wednesday the currency firmed to about 16.14 against the dollar, its strongest level since early March, while foreign investors piled into South African government bonds at the fastest pace since January. It looks like a vote of confidence in the country. It mostly isn't.
A number from Washington
The spark came from a single data release in the United States. American consumer prices rose just 0.1% in July and 3.4% over the year, a tame reading that reinforced bets the US Federal Reserve will leave interest rates alone and sent the dollar lower. A weaker dollar makes higher-yielding currencies like the rand more attractive, and it supercharged what traders call the carry trade: borrowing cheap dollars to buy assets that pay more elsewhere. The rand has now strengthened about 5% against the dollar since the end of March. The money followed within days
The flows show up fast. Global investors bought a net R23.1 billion of South African government debt in the first week of August, the largest weekly inflow since January, and the rand carry trade returned 2.5% this month, the best of 22 developing-nation currencies Bloomberg tracks. Helping the case at home is a hawkish Reserve Bank keeping local yields attractive, with the 10-year bond yield down more than 80 basis points from its March highs to around 8.57%. As one Ninety One portfolio manager put it, continued rand appreciation could let bonds price out a lot of the inflation risk built into yields; a State Street strategist called the rand the best way in emerging markets to bet on a weaker dollar.
The catch is that strength this borrowed can be handed back. Traders still see a real chance the Fed raises rates next month, with markets pricing roughly a 50% chance of a US increase against about 68% for one from the Reserve Bank, and any surprise would tug the same money out of the rand and the bond market together. For now the yield advantage holds and the inflows keep coming; the number to watch just happens to sit in Washington, not Pretoria.
