Online Reporter
South Africa’s currency is on track for its biggest August gain in two decades, with stocks not far behind, as a weakening dollar spurs demand for high-yielding assets outside the US.
The rand is up 3 percent against the greenback this month, the best performance for August since 2005. And the country’s equity benchmark has clocked a gain of 3.4 percent, the most for the month since 2006.
South African assets are returning to investors’ favour as the coalition government tackles much-needed economic reforms, the fiscal outlook brightens, and the South African Reserve Bank keeps inflation low. Strong prices for the precious metals and other raw materials that make up the bulk of South Africa’s exports have also bolstered the rand and the appeal of the country’s mining companies.
“Rand fundamentals remain strong as South Africa’s terms of trade have surged on elevated commodity prices,” Rand Merchant Bank strategists John Cairns and Manqoba Madinane wrote in a report.
The South African currency and equities typically weaken in August as investors in Europe and the US slow down for the summer holiday season. The rand’s average decline for the month over the past 20 years is 2.4 percent, while it’s one of only three months in which the FTSE/JSE Africa All Share Index hasn’t shown an increase on average over the same period, according to data compiled by Bloomberg.
The rand has handed investors 3.2 percent in the carry trade in August, among the top returns in emerging markets. The latest weekly government bond auction drew the strongest demand in seven weeks, with investors anticipating strong returns on the back of the coalition government’s plans curb the fiscal deficit.
“Data points to good inflows into the rand, and other higher-carry currencies, funded either from Asia or the US dollar itself,” said Lauren van Biljon, a senior portfolio manager at Allspring Global Investments UK.
“There’s space for the currency to continue to do well into year-end.” — Bloomberg
