South African Rand Stalls

The South African rand has been the strongest currency this year, appreciating 23% against the dollar in H1. Since putting its recent low (with the dollar at ZAR8.28) on June 23, the rand has appreciated every day, for a cumulative gain of 6.2%, until today. The rand is off by a little more than 0.5%. The ostensible cause of the modest profit taking is disappointment with the purchasing managers index. It rose to 37.9 in June from 37.3 in May, but the market was more optimistic. Manufacturing is a small part of the South African economy, accounting for a little more than 1/6 of GDP.

The South African rand has been bolstered, arguably,more by international considerations, like relatively high yields and its commodity producer status, than by domestic factors. The sell-off in government bonds today, where the 10-year benchmark bond yield has risen almost 20 bp along side the pullback in the rand suggests global investors may very well be taking profits.

The strength of the rand does the domestic economy little good. It may help temper imported inflation but in May consumer prices stood 8% above year ago levels. Benchmark effects should also contribute to a steeper decline in South African inflation in June and July.

It is always difficult to pick bottoms and tops of course, and rand buying had been relentless. It is too early to have much confidence that the rand has topped out. Technically there are dollar bullish divergences in the relative strength index. A move above yesterday's dollar high near ZAR7.84 would be the first "real" sign that a bottom may have been reached and suggesting near-term potential toward ZAR8.00.