BLBG: Rand May Slide 13% by Mid-2011 as Carry Unwinds, Brait Says
By Garth Theunissen
Jan. 18 (Bloomberg) -- The rand may slide as much as 13 percent by mid-2011 as rising interest rates in developed nations erode the appeal of South Africa’s higher-yielding currency, said Brait SA, the nation’s biggest buyout company.
The currency may slump to 8.25 per dollar by the end of the first quarter of 2011 and 8.50 by the middle of next year as rates in the U.S., Japan and Europe increase, reducing the appeal of using “cheap loans” from developed nations to buy the currency, Colen Garrow, an economist at Brait, said by telephone. The rand will weaken to 8 per dollar by the end of this year, he said.
“We’re likely to see a compression in yields between South Africa and the developed world over the next 12 to 18 months,” said Garrow. “When that starts to happen the rand could slide quite viciously.”
The rand traded little changed at 7.4015 per dollar by 12:16 p.m. in Johannesburg, from a close of 7.3986 on Jan. 15. Against the euro it was steady at 10.6438, from 10.6431.
South Africa’s currency rallied almost 28 percent against the dollar last year as policy makers cut interest rates to 0.25 percent in the U.S. and 1 percent in the euro-zone to ease the effects of the worst global recession since the Great Depression. That enabled the South African Reserve Bank to reduce its benchmark rate, while still maintaining the rand’s yield advantage.
The rate, which started last year at 11.5 percent, made the rand an attractive purchase for so-called carry trades and propelled the currency to second-best performer in emerging markets after Brazil’s real. In carry trades investors borrow at a low interest rate to invest in markets where returns are higher, earning the spread between the cost of borrowing and the returns on their investment.
Rush to Exit
New York University Professor Nouriel Roubini said in October that a rebound in the dollar may force carry-trade investors to “rush to the exit.” The Federal Reserve may raise its benchmark rate by 0.5 percentage points to 0.75 percent by year-end while South Africa will lift its rate by a quarter point to 7.25 percent, according to a Bloomberg survey.
“The first sign that the U.S. is going to start raising rates will cause a flight to quality back into the dollar,” Garrow said. “That’ll make emerging-market assets less attractive.”
To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net
