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Johannesburg - The government, which has repeatedly bemoaned the strength of the rand, is probably hoping the currency won't extend this week's Japan-related slide as this would stoke inflation at a time of sluggish growth.
In recent years the ANC government has been under pressure from its trade union allies to weaken the rand, with pressure from a strong currency being blamed for leaving almost half of the adult population without jobs.
The government has voiced its concern at the rise and taken limited action to try to weaken the unit. However, unike other emerging markets such as Brazil, South Africa rejected the idea of taxing capital inflows last year, which were the main driver of rand gains.
Analysts say the government wouldn't like to see a dramatic weakening of the rand in a short space of time.
"Would authorities over time prefer a rand that is weaker? Yes,” said Jeff Gable, head of research at Absa Capital.
"Would they like it to get weaker right away? Probably not, because in the current environment that would generate just as many problems as it might be seen to solve."
The rand has gained about 26% since the beginning of 2009, and performed better than emerging peers Brazil and Turkey so far this year. But it slid nearly 7% this week, as markets panicked that a series of natural disasters in Japan would hamper global growth.
There were also signs that Japanese funds and retail investors could repatriate cash held up in foreign exchange-denominated bonds, including rand.
Despite a rebound following action by the Group of Seven to steady the yen, analysts see further weakness for the South African currency in the longer term as foreign capital inflows taper off. More capital could leave the country when the developed world starts raising interest rates.
The inflation factor
Rand strength has been positive for inflation though, which has been within the central bank's 3% to 6% target since February 2010.
The bank is expecting it to remain in that band until the end of 2012, but is widely expected to raise its forecasts at a Monetary Policy Committee meeting next week in the light of higher global oil and food prices.
The favourable inflation environment gave the Reserve Bank room to slash its repo rate by 650 basis points to 5.5%, in an effort to stimulate the economy.
Manufacturing in Africa's biggest economy was hardest hit by a 2009 recession and is yet to recover fully. Industry is blaming the rand for its woes.
In an effort to weaken the rand, or at least arrest its gains, the government last year stepped up foreign exchange reserves accumulation and relaxed exchange controls.
But inflation is slowly picking up. Reserve Bank governor Gill Marcus said last week the bank was worried about the impact of global oil and food prices on inflation.
Should inflation rise, it would stoke protests among the millions of unemployed and low earners who spend a big chunk of their income on food and transport.
Unions, including trade federation Cosatu, would demand above-inflation wage increases and resort to strikes that often characterise the wage-negotiation season.
Relations between the ANC and its allies are already tense and the ANC alliance can ill afford further strains.
Policymakers are in a quandary about how to strike a balance between achieving a competitive currency that supports growth without pushing up inflation.
Last year all policymakers were in agreement the rand was "overvalued", but there seems to have been a subtle shift.
Finance Minister Pravin Gordhan refrained from announcing new measures to weaken the rand in his budget last month, saying the "strongish" rand was helping to curb inflation.
"Rand weakness has perhaps moved down the pecking order in government's list of priorities," said Peter Attard Montalto, emerging market strategist at Nomura in London.
"There is also a growing view we are sensing out there that the Sarb (SA Reserve Bank) would rather have a stronger currency than increase rates."
"While this is an exaggeration, we do think (Sarb governor) Marcus is of the camp on the MPC (Monetary Policy Commitee) who wants rate stability into next year. The issue is about timing and speed of rand strength."
Besides, even if the rand were to weaken dramatically, it is unlikely to solve South Africa's competitiveness problems.
About a third of exports go to the United States, Japan, Germany, the United Kingdom, Italy and France. Although China is the biggest bilateral trading partner, only 11% of South Africa's exports go to the fast-growing economy.
"The argument for a weaker rand just doesn't stack up. We do better when the G7 countries do better. Our economic performance is not linked to rand weakness," said Adrian Saville, chief investment officer at Cannon Asset Managers.
In recent years the ANC government has been under pressure from its trade union allies to weaken the rand, with pressure from a strong currency being blamed for leaving almost half of the adult population without jobs.
The government has voiced its concern at the rise and taken limited action to try to weaken the unit. However, unike other emerging markets such as Brazil, South Africa rejected the idea of taxing capital inflows last year, which were the main driver of rand gains.
Analysts say the government wouldn't like to see a dramatic weakening of the rand in a short space of time.
"Would authorities over time prefer a rand that is weaker? Yes,” said Jeff Gable, head of research at Absa Capital.
"Would they like it to get weaker right away? Probably not, because in the current environment that would generate just as many problems as it might be seen to solve."
The rand has gained about 26% since the beginning of 2009, and performed better than emerging peers Brazil and Turkey so far this year. But it slid nearly 7% this week, as markets panicked that a series of natural disasters in Japan would hamper global growth.
There were also signs that Japanese funds and retail investors could repatriate cash held up in foreign exchange-denominated bonds, including rand.
Despite a rebound following action by the Group of Seven to steady the yen, analysts see further weakness for the South African currency in the longer term as foreign capital inflows taper off. More capital could leave the country when the developed world starts raising interest rates.
The inflation factor
Rand strength has been positive for inflation though, which has been within the central bank's 3% to 6% target since February 2010.
The bank is expecting it to remain in that band until the end of 2012, but is widely expected to raise its forecasts at a Monetary Policy Committee meeting next week in the light of higher global oil and food prices.
The favourable inflation environment gave the Reserve Bank room to slash its repo rate by 650 basis points to 5.5%, in an effort to stimulate the economy.
Manufacturing in Africa's biggest economy was hardest hit by a 2009 recession and is yet to recover fully. Industry is blaming the rand for its woes.
In an effort to weaken the rand, or at least arrest its gains, the government last year stepped up foreign exchange reserves accumulation and relaxed exchange controls.
But inflation is slowly picking up. Reserve Bank governor Gill Marcus said last week the bank was worried about the impact of global oil and food prices on inflation.
Should inflation rise, it would stoke protests among the millions of unemployed and low earners who spend a big chunk of their income on food and transport.
Unions, including trade federation Cosatu, would demand above-inflation wage increases and resort to strikes that often characterise the wage-negotiation season.
Relations between the ANC and its allies are already tense and the ANC alliance can ill afford further strains.
Policymakers are in a quandary about how to strike a balance between achieving a competitive currency that supports growth without pushing up inflation.
Last year all policymakers were in agreement the rand was "overvalued", but there seems to have been a subtle shift.
Finance Minister Pravin Gordhan refrained from announcing new measures to weaken the rand in his budget last month, saying the "strongish" rand was helping to curb inflation.
"Rand weakness has perhaps moved down the pecking order in government's list of priorities," said Peter Attard Montalto, emerging market strategist at Nomura in London.
"There is also a growing view we are sensing out there that the Sarb (SA Reserve Bank) would rather have a stronger currency than increase rates."
"While this is an exaggeration, we do think (Sarb governor) Marcus is of the camp on the MPC (Monetary Policy Commitee) who wants rate stability into next year. The issue is about timing and speed of rand strength."
Besides, even if the rand were to weaken dramatically, it is unlikely to solve South Africa's competitiveness problems.
About a third of exports go to the United States, Japan, Germany, the United Kingdom, Italy and France. Although China is the biggest bilateral trading partner, only 11% of South Africa's exports go to the fast-growing economy.
"The argument for a weaker rand just doesn't stack up. We do better when the G7 countries do better. Our economic performance is not linked to rand weakness," said Adrian Saville, chief investment officer at Cannon Asset Managers.
