November 24, 2003

By Vernon Wessels

Johannesburg - The direction of the rand this week will be driven by what is expected to be positive inflation and economic growth data.

The currency gained almost 3 percent against the dollar last week. On Friday it briefly touched R6.4817 a dollar, its best level since March 2000, but quickly weakened back above the key R6.50 mark.

It was trading at R6.5620 a dollar late on Friday, as the gold price slipped after skipping above $400 an ounce last week and the dollar stabilised after sliding to a record low of $1.1980 a euro on Thursday.

Gold moved in a range of $392.95 to $395.25 on Friday while the dollar, which moves inversely to the bullion price, moved in a range of $1.1871 and $1.1918 to the euro, with the US currency displaying signs of strengthening towards the close of trade.

Chris du Bois, the chief dealer at Master Currency, expected the rand to weaken in line with the euro.

"The rand needs to consolidate below R6.60 a dollar for a while. The euro does not seem to have the legs to push stronger against the dollar and the price of gold has also come off," he said.

There was strong demand from locals wanting to buy foreign exchange to travel abroad. "Christmas has come early for people who planned their overseas holidays at the beginning of the year with the expectation they will be paying R8.50 a dollar," du Bois said.

"Inbound demand is also holding up very well and the tourists are still coming to South Africa."
 

Marisa Fassler, an economist at JP Morgan, said any downside surprises on growth or inflation could prompt the market to start pricing in an interest rate cut of more than 100 basis points when the Reserve Bank's monetary policy committee meets next month.

Fassler expects third-quarter gross domestic product (GDP) growth of 2.4 percent from 1.1 percent in the second quarter.

The Reserve Bank's targeted measure of inflation, CPIX, headline inflation less mortgage rates, would measure 4.3 percent for October from 5.4 percent in September, she said.

Producer prices, due to be released on Wednesday, would decline by 2 percent in October from 1 percent in September because of the strong rand.

John Stopford, global fixed income strategist at Investec Asset Management, said inflation was closing to reaching a turning point and might soon start accelerating - limiting the scope for aggressive interest rate cuts after a 100 basis points reduction next month.

He expects CPIX to have risen by 0.1 percent month on month and by 4.5 percent year on year, slightly above the consensus forecast of 4.3 percent.

Further significant rand strength would be needed to prevent inflation from turning higher into next year as the favourable effects of the rand, especially for food and oil, had started to unwind, Stopford said.

The same would apply to producer prices, which, he expected, would move back into positive territory in early 2004.