The rand has climbed 4.58% against the dollar so far this year, driving members of the ruling African National Congress to call the strongly appreciated currency "a mischievous child" and feeding speculation that Pretoria could be gearing up to tax foreign capital flows in order to prevent further gains. Overseas speculators account for about 75% of all rand trading as it is.
But the International Monetary Fund warns that the rand is already overvalued by up to 15% on a fundamental basis. Meanwhile, the strong rand is making it difficult for local businesses to compete on the global playing field. South African trade unions are agitating for more aggressive government action -- perhaps even a concerted intervention in the currency market to buy dollars -- as real economic growth slows.
Although the rand has surged, the rand ETFSZR has performed even better, jumping a full 10.3% so far this year.
This outperformance is once again due to the fact that SZR, like many other funds that strive to replicate the gains or losses of a given currency, does not actually invest in rands or rand-denominated securities. Instead, the fund is primarily invested in U.S. Treasury bills and other dollar-denominated money market instruments, which have done spectacularly well this year as the so-called "bond bubble" of the first quarter evolved into the flight to quality bid that heralded first the Chinese real estate panic and then the euro crisis.
These unusual gains are unlikely to be repeated, which could mean that SZR and funds like it are due to lag their benchmarks in the future. But in the meantime, those who have been in this portfolio over the last few months have been printing significant paper gains.