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Wednesday, September 9, 2009

Runaway rand gets lift from reserves

THE rand hit a new 13-month peak yesterday, boosted by rising global risk appetite, higher gold prices and a surge in reserves after a 2,17bn shot in the arm from the International Monetary Fund (IMF).

The currency firmed to R7,57/ — its strongest level since August last year — and traders said it could extend its gains if the global backdrop remains favourable.

The trend is good news for SA’s inflation outlook, but disturbing for the embattled manufacturing sector, which could shed more jobs as rand strength erodes the competitiveness of local exports.

Gross gold and foreign exchange reserves leapt 6,2% to 38bn last month after the IMF gave SA 2,2bn as part of a worldwide cash injection, data from the Reserve Bank showed yesterday.

They are set to climb further this month as SA will get another 281m cash allocation from the IMF, and may add to its reserves the proceeds of a 500m increase in its global bond issue last month.

The IMF agreed earlier this year to disburse the equivalent of 250bn to member states to help them deal with the global crisis.

Local banks have been shielded from the credit crunch, but the rand lurched to R11,87/ late last year as investors sold “risky” assets.

Ample reserves help shield a country’s currency from global volatility. SA’s reserves have climbed steadily since 2004, but still tend to lag those of its emerging market peers, and the Bank has said it will continue to build them.

The latest inflows will remove any immediate pressure on the Bank to buy foreign exchange aggressively in the months ahead, which would weigh on the rand.

Since the global crisis erupted, the Bank has refrained from buying large amounts of foreign exchange, to avoid destabilising the rand and sparking higher inflation.

“Everything in the short term looks good for the rand,” said Citgroup senior dealer Julian Wilson. “Provided none of the global factors come back to haunt us it looks set to see further strength.”

The rand broke a key level at R7,72/ on Thursday after news that SA’s current account deficit shrank more sharply than expected in the second quarter of the year.

Its rally gained momentum yesterday as global stock prices closed near their peak this year, driven by a weekend agreement by G-20 countries to keep economic stimuli running. The JSE rose 1%, up for the third trading session running.

Gold prices also supported the rand, edging above 995/oz and approaching the 1000 level. The local unit was in step with the Australian dollar, which scaled a one-year peak yesterday.

Wilson said the rand would have scope to appreciate to R7/ in coming weeks if it broke the next significant level at R7,50/ . It has risen 26% against the dollar this year and 20% against a trade- weighted basket of currencies.

Other analysts have similar views . “There are a number of factors which could drive further rand gains in the short term, but we have some concerns over the medium term,” said Rand Merchant Bank currency strategist John Cairns. These included high inflation and the likelihood that SA’s deficit on the current account would start expanding again soon, he said.

Imports have fallen much faster than exports this year as the country entered its first recession since 1992. They are expected to rise faster than exports when growth rebounds.

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