ZAR Best Performing Currency

The South African rand is the strongest currency today, gaining 1.87% against the sagging greenback. Several factors are helping lift the rand.

Many are linking the rally in gold to new record highs with the rand's strength. Year to date the correlation between dollar-rand and gold is -18.8%. The euro has been more correlated with gold year to date (26.5%). However, in the last three months, the rand has shown a 60% correlation, eclipsing the euro's 50% correlation.

Tomorrow South Africa reports Q3 GDP figures. The consensus expect the 3-quarter contraction will be snapped with a 0.5% annualized expansion to be reported. Manufacturing output (~1/7 of GDP) appears to have expanded by 2.5% over the quarter.

GDP is expected to be lifted by public spending. Of course, growth in most countries has been fueled by public expenditure, but in South Africa's case the public expenditure are not the run of the mill garden variety. Instead, consider that South Africa hosts the World Cup next year (beginning in June). Partly in preparation for the event, the government is ramping up its infrastructure spending.

Without the related construction spending the economic contraction would have been much deeper. Through March 2013, South Africa is committed to spending about $115 bln on ports, stadiums, roads, etc. This is on a $277 bln GDP. Although there is no reason to expect the infrastructure spending will be evenly distributed over the three years, but for the sake of ease assuming it is, it is worth about 13-14% of GDP per year.

The government anticipates nearly half a million foreign visitors will be attracted by the World Cup., which will boost GDP by 1%.

Of course, the rand is also being boosted by the general risk/liquidity environment and relatively attractive interest rates. Although some government officials have expressed concern about the rand's strength (up 27.4% vs the US dollar year-to-date), and have threatened intervention, there is no talk about curb on capital inflows and most recently the government took another step toward liberalizing capital outflows.

The US dollar encountered strong selling pressure just above ZAR7.6. Initial support now is seen near ZAR7.40, but there is potential toward ZAR7.34 in the coming weeks, assuming the risk-on trade strategies remain in vogue.