Since the previous meeting of the MPC on 11 September 2002, the USD/ZAR has appreciated sharply by some 14,9 per cent to around 9,25 rand per US dollar. As is usually the case, there have been a number of factors or drivers which explain this strengthening in the rand’s value. Before I list these drivers and discuss them very briefly, I would just like to make the point that the rand is undervalued taking into account its purchasing power. We welcome the recent strengthening as it will assist in dampening inflationary pressures and expectations. The orderly manner in which the exchange rate has moved to stronger levels is also comforting.  Probably the most significant factors explaining the rand’s strength have been sales from exporters and the attractiveness of South African financial assets often stemming partly from the interest rate differentials. Exporters have been selling somewhat more aggressively their foreign exchange proceeds as sentiment towards the rand improved. (They were, of course, concerned that any delay in selling these proceeds would result in lower rand receipts.) The relatively attractive interest rates prevailing in South Africa also served to attract non-residents capital flows. The impact of these two drivers was enhanced by various other circumstances viz. 1.            A general reduction in risk aversion which is probably best reflected in an improving attitude towards emerging markets. Investors seem more comfortable taking on emerging-market risk particularly after election-outcomes in Brazil and Turkey which were well-received by the market. 2.            A generally weaker trend in the value of the US dollar over the year also contributed to an environment where high-yielding rand assets would be sought after. 3.            South African macro-economic fundamentals, including prudent monetary and fiscal policies and positive trade balances, in contrast to many other parts of the world, continue to merit attention. This fact is reflected in the recent positive statement by Standard and Poor’s regarding South Africa’s credit outlook. 4.            The improved sentiment towards the rand also led to hedging decisions regarding currency risk being supportive of the rand. For example, importers might have been induced not to cover forward their expected FX purchases and / or to sell back existing cover. 5.            Perceptions regarding South Africa’s status almost as a safe haven have improved following increased tensions in other parts of the world.  TT MBOWENIGOVERNOR28 November 2002  ​