The rand rallied to a three-month high against the dollar, extending its second weekly gain as producer inflation quickened and consumer borrowing rose, signaling rates may climb and boosting the rand's carry appeal.

The currency of Africa's biggest economy appreciated as much as 0.8 percent to 6.71764 per dollar, its strongest level since Jan. 6, and traded at 6.72125 per dollar as of 3:42 p.m. in Johannesburg, taking its gain this week to 1.7 percent.

The cost of goods leaving factories and mines advanced 6.7 percent in February, the fastest pace since September, the statistics office said yesterday. Credit growth accelerated to 5.4 percent in February as interest rates at a 30-year low spurred consumer spending, the central bank said yesterday. The bank won't be "soft" on inflation and will try to prevent rising oil and food costs from driving consumer prices above the upper end of its target margin, Governor Gill Marcus said March 29.

"Just about all the local data of significance released this week highlights the fundamental backdrop which is likely to promote rather than detract from more rand resilience and strength," Tradition Analytics researchers said in an e-mailed statement to clients today. "Whilst the timing of a rate hike is up for debate, the fact that a hike in South Africa would only widen the interest-rate differential to its major trading partners again boosts the potential attraction of South African assets to foreigners."

Eoin Treacy's view Interest rate differentials have taken on an added attraction for investors as the scope of multilateral intervention to weaken the Yen is apprehended. Countries with comparatively high interest rates, especially those more likely to increase them over the short to medium-term are particularly alluring for "born again" carry traders.

The South African Repo rate appears to have bottomed at 5.5% offering an attractive carry for those with a short position in an ultra interest rate currency. The Rand is currently rallying towards the upper side of a two-year range against the Yen and a clear downward dynamic would be required to check potential for additional upside. The Rand denominated 10-year yield remains within a 5-year range and is currently near the upper side, close to 9%. While this area has offered resistance on a number of previous occasions, a break in the short-term progression of higher reaction lows would be required to indicate a return to medium-term demand dominance.

The Brazilian Selic Target Rate has risen from 8.75% early last year to 11.75% at present. The Real found support near the lower side of an 18-month range two weeks ago and is currently rallying towards the upper side. The relatively liquid Real denominated 3-year bond yield is currently testing the upper side of an 18-month range and a sustained move below 12.75% would be required to question potential for some additional upside.

The Russian Refinancing Rate is currently at 8%. The Ruble found support against the Yen from late October and has trended steadily higher since. It is now testing the ¥3 area but a clear downward dynamic would be required to check potential for some additional upside. The Ruble denominated Russian Zero Coupon 10-year bond hit a medium-term peak near 8.5 in February and is currently testing the lower side of a three-month range. An upward dynamic will be required to indicate a return of demand dominance in this area.

The Indonesian Reference Rate is currently at 6.75% but is likely to rise further over the medium term. The Rupiah, in common with a number of the above cross rates is rallying from the lower side of a two-year range. The Rupiah denominated 10-year bond yield hit a near-term peak close to 9% in January and has returned to the first area of potential support near 8%. It will need to rally from the current area to demonstrate supply dominance in this area.

The Australian Target Rate of 4.75% has been on hold since November. Additional interest hikes may be delayed due to the cost of rebuilding following the Queensland floods. However the Australian Dollar has surged against the Yen over the last few weeks, not least because it is liquid, easily traded and has a favourable interest rate differential. The Australian 10-year yield has been ranging below 6% since mid 2009. It found support near 5.25% two weeks ago and is currently rallying towards the upper side of the range. A sustained move below 5.25% would be required to indicate a return to demand dominance.

The above currencies all look primed to advance versus the Yen over the short to medium term. Most of the respective bond yields have not attracted significant bullish interest. This may be because the potential for additional interest rate hikes, aimed at combating inflationary pressures, currently outweighs the allure of the carry trade. On the other hand the stock markets for these countries have all bounced emphatically of late and would need to sustain moves below their respective 200-day MAs to question medium-term upside potential.