Rand Shrugs off C/A Improvement

Earlier today South Africa reported a smaller than expected Q4 current account deficit. At 2.8% of GDP, it is the smallest in about 4 1/2 years.

South Africa's current account deficit peaked in 2008 just above 7% of GDP. For all of last year it was 4%. A combination of increased trade volumes and higher prices account for the narrower shortfall.

Export volumes (excluding gold) rose 6.6%, but in value terms exports rose 10.7%. Import volumes increased by 8%. This seems largely consistent with what other large commodity producers have experienced.

Often the key issue is not the size of the deficit, but how it is funded. Foreign investors bought 41.2 bln rand worth of South African stocks and bonds in Q4, more than a 50% increase over Q3.

In Q4 the rand was one of the strongest currencies against the US dollar, appreciating by about 4.2% and coupled with the carry, generated a total return of 6.1% for US-dollar based investors in Q4. The rand has stabilized here in Q1 10, posting less than a 1% gain against the greenback.

The currency's strength (on a trade-weighted basis) will likely be a drag on inflation. South Africa will report Feb inflation on Wednesday. The year-over-year rate is likely to slip toward 5.7% from 6.2% in January. The central bank meets on Thursday. No one expects a change in the 7% bank rate, but should the rand remain strong and price pressures ease, speculation of a rate cut might re-emerge.

Despite the favorable news, the rand has made little headway today. After yesterday's recovery, the lack of follow through today is a bit disappointing. The ZAR7.30 area provides support for the dollar. This lower end of the dollar's range has been violated a handful of times since November, but the greenback has rarely closed below it. Short-term technical indicators warn of near-term upside risk for the dollar. ZAR7.40 is roughly yesterday's high and offers initial resistance.
Rand Shrugs off C/A Improvement Rand Shrugs off C/A Improvement Reviewed by Marc Chandler on March 23, 2010 Rating: 5
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