Rand Increases on Favorable Economic Data of South Africa

Among the emerging market currencies, the best performer for today was Rand. The major currency of South Africa was helped by the fact that the economy of South Africa has expanded at a good pace in the last 3 months of 2012, thereby surpassing the estimates.

Rand actually advanced for the 4th straight day and on today, it gained around 0.9%. The currency is now priced at 8.7801 per USD and is at its highest level since 15th February. The yields on the benchmark 10.5% bonds which are due by December, 2026 increased by 2 basis points and are now at 7.23%.

The Gross Domestic Product of South Africa was 1.2% in the 3rd quarter of 2012. However, the same increased to 2.1% for the last quarter surpassing the initial estimates of 1.7%. Still, growth for the entire year slowed down to 2.5% in 2012, lower than that of 3.5% for 2011.

The head of Strategic Research Department of Nedbank Group Ltd., Mohammed Nalla stated that the South African economy is not in that bad shape as the market expected it to be. Nalla added further that the market had priced in a rather higher bearish number.

The 2013 economic growth forecast was cut to 2.6% from that of 2.9% by the Reserve Bank in January. According to economists, the GDP of South Africa should grow at least at a rate of 7% a year through 2020 so that the economy can get to a stable zone.

After the surprise reduction made in last July, the Reserve Bank has kept the benchmark repurchase rate at 5%. The bank is actually concerned that if Rand is weak and wages are high, this will push inflation above the 3% price target band to that of 6%. If the borrowing costs are low, the yield advantage of Rand over USD will get reduced.

Peter Attard Montalto, the Strategist of Nomura Holdings Inc., stated that a cut in rates in 1st quarter of 2013 is not expected. He added that today’s results reinforce some sort of short term strength for Rand. However, it is to be seen what happens in the middle of the year as the mining industry is still plagued by the labor disputes.

HSBC Holdings, on the other hand, expects Rand to go to 7.80 per USD by end of 2013.