Rand bubbles to top as low volatility to rates fuel gains

South Africa’s rand, on course for its first monthly gain in three, is set to climb further as the prospect of more interest-rate increases amid the lowest volatility in almost 13 years lures foreign buyers.

The rand strengthened 1 percent since the end of June, the most among 16 major currencies tracked by Bloomberg, fuelled partly by investors borrowing in dollars to purchase the nation’s assets. The advance helped drive a 2.9 percent return for South African bonds this month, the best performance of 16 Bloomberg emerging-market indexes.

Reserve Bank Governor Gill Marcus lifted the central bank’s policy rate by 25 basis points on July 17, and warned of more increases. Policy makers are struggling to tame inflation while limiting the damage higher borrowing costs risk inflicting on the slowing economy. Higher rates are increasing rand returns relative to peers amid sustained appetite for emerging-market assets as volatility falls.

“Investors are quite happy to sit on those long-rand positions at the moment,” Ion de Vleeschauwer, the chief trader at Bidvest Bank Ltd., South Africa’s largest chain of money-changers, said on July 25. “Volatility can’t stay at these levels indefinitely, but there isn’t anything that looks like it’s going to upset things in the short term.”

The rand’s three-month implied volatility against the dollar fell to 10.05 percent last week, the lowest level since September 2001, according to data compiled by Bloomberg. A measure of price swings in developing-nation currencies fell to a record, according to JPMorgan Chase & Co. indexes.

The rand carry trade returned 1.55 percent this month, the most among major currencies.

South African 10-year yields are the sixth-highest among 24 emerging markets tracked by Bloomberg.

One-year interest – rate swaps, used to lock in borrowing costs, are signalling another 50 basis points of increases over the next 12 months.

That is boosting the rand’s appeal relative to most peers, said Mohammed Nalla, head of strategic research at Nedbank Group Ltd.

“We’re in a tightening cycle,” Nalla said by phone from Johannesburg on July 25. “On a relative basis, the carry on the rand is looking attractive. You just need currency stability and the guys will come for the yield pickup.”