The rand sprinted to a 14-month peak of R7.36/$ on Tuesday, extending gains in a sustained trend, which analysts warned could hamper economic recovery in SA.

The currency has been buoyed by a heady mix of global risk appetite, a weaker dollar and prospects of large capital inflows from the pending MTN-Bharti merger.

But its gains this year of more than 20 percent against a trade-weighted basket of currencies will undermine the competitiveness of local exports just as global demand picks up.

"For now it's more of a global story driving the rand stronger, but the very fact of its strength is damaging recovery prospects and could be its own undoing," said Razia Khan, Standard Chartered's regional research head for Africa.

Traders say that the volatile currency is ripe for a short-term correction, but it could then notch up further gains, taking it near the key R7/$ level.

"The rand is outperforming most currencies," said Citigroup senior dealer Julian Wilson. "Short term, it's a bit overdone, but we still look like we're on track for R7.20/R7.10 (to the dollar)".

Strongest levels since August 2008

The rand is now trading at its strongest levels since 5 August last year, despite indications that the merger between SA's MTN and India's Bharti is not a done deal.

The rand has shrugged off verbal intervention from Reserve Bank governor Tito Mboweni, who called news agency Reuters last week to say that its gains were "overdone", and a "retracement" was likely.

In a knee-jerk response, the unit weakened briefly to R7.57/$ from R7.40/$. Analysts say the rand is again too strong for SA's embattled manufacturing sector, which exports about a third of what it produces.

Factory output accounts for 14 percent of the economy, and has been hardest hit by the global downturn.

"We are entering a recovery phase for the global economy, and SA needs to be competitive for both exports and investment capital. The currency is too overvalued to achieve this," said Nomura International emerging market economist Peter Attard Montalto.

He predicts that even if the rand stays at R8/$, the economy could lose 2.5 percentage points in terms of growth in gross domestic product (GDP) over two years.

Rand could hold gains for 2009

Forecasts vary, but several analysts think the rand could hold its gains for the rest of this year — provided that global conditions remain favourable. In step with global markets, the JSE has climbed steadily since March, notching up a gain of about 17 percent in the year to date.

Net foreign buying of local equities amounted to a record R13.9-billion last month, while bond purchases reached R7.9-billion.

That helps to explain the rand's appreciation, which was also spurred by news that the deficit on the current account, the broadest measure of trade, narrowed sharply to 3.2 percent of GDP in the second quarter.

The shortfall, seen as the Achilles heel of the economy, was 7.4 percent of GDP last year, a 36-year peak.

Analysts differ on the extent to which the proposed MTN-Bharti merger has buoyed the rand, given the regulatory complications.

There is also uncertainty on the amount of foreign exchange that could actually flow into SA's markets.

Powerful combination for the rand

Montalto sees a net inflow of R6.3-billion, but says most of it could go through the Reserve Bank, which could neutralise the two sides of the deal.

Absa Capital's research head, Jeff Gable, attributed the rand's rally squarely to global conditions, which have both helped to reduce the size of the current account gap and made it easier to finance.

"That's a very powerful combination for the rand," Gable said. He predicted the unit would end this year at R7.50/ or "even stronger", while Khan saw it at R7.10/ .

Finance Minister Pravin Gordhan made it clear yesterday the government would not try to intervene to weaken the rand, an expensive exercise that global markets have foiled in the past.

The Bank's hands are also tied. If it steps up the pace of foreign-exchange purchases, it would have to mop up excess rands through bond issuance, costly at a time of increased issues from the Treasury and state-owned companies.

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