Despite the recent efforts of the Reserve Bank and Treasury to stabilise the rand, the unit yesterday hit a best level of less than R7.30 to the dollar - from R7.75 earlier this month.
Annabel Bishop, the group economist at Investec, said the Treasury had been providing the resources for the central bank to "actively accumulate hard currency, with the result that the rand has traded in a relatively narrow range since April".
While news of active intervention in the currency market may not come as a surprise, the extent of support from the Treasury has been uncertain. After the meeting of the bank's monetary policy committee (MPC) last week, Marcus said discussions with the Treasury about "various options available to address (the level and volatility of the rand), as well as the availability of resources to do so, are ongoing".
The reference to "discussions" sounds tentative but it seems the extent of support from the Treasury could have been substantial.
Bishop said the Treasury had been building its deposits of foreign exchange held with the central bank since April last year and these were now worth $4 billion (R29.5bn).
The process escalated in March, Bishop said, coinciding with a period of relative stability in the rand.
Bishop said for most of the year the dollar had traded between R7.20 and R8 but between April and early this month the band had narrowed to R7.50 to R7.80. However, after the announcement last week that the bank would keep its repo rate on hold, the currency leapt out of the band.
Bishop said without intervention the currency would have been stronger. The reason for this is that, when the bank sells rands to buy foreign currency, the exercise weakens the local currency.
Bishop questioned the wisdom of the bank's decision to keep rates on hold, given its efforts to moderate rand volatility "particularly as the Reserve Bank said well before the meeting of the MPC that no policy guidance was required".
Jabulani Sikhakhane, the chief director of communications in the Treasury, said yesterday: "The Minister of Finance did indicate in the 2010 Budget speech that National Treasury would support the SA Reserve Bank's accumulation of reserves to achieve national goals." And he said: "We shall continue to accumulate reserves to mitigate our external vulnerability."
The central bank has been urged by trade unions, exporters and more recently the Organisation for Economic Cooperation and Development (OECD) to intervene more actively in the currency market.
However, the central bank has cited the cost incurred because return on investment through foreign currencies is lower than investment through the rand.
In April, governor Gill Marcus said the bank took an after-tax loss of about R1bn for the 2009/2010 financial year due to its intervention in the currency market.
Bishop said: "This loss is likely to grow now as Treasury and the bank fight to keep the rand from piercing the key resistance level of R7.20 a dollar after the MPC decision not to alter interest rates. Once the rand convincingly gets through the R7.20 mark it will target R6.90."
Kevin Lings, an economist at Stanlib, said news that the Treasury was actively supporting the bank's intervention could remove an important element of uncertainty in the market. He said the situation created two risks.
One was that the rand would weaken sharply, if market participants sensed a reduced risk to shorting the currency. In other words, traders would sell rands they did not have for future delivery, hoping to make a profit by buying it back at a lower price.
The second risk was that a big player like a hedge fund could decide to take on the bank, which would make it a costly exercise for the Reserve Bank to try to weaken the rand.
Sourve: Business Report
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