While the South African government could send signals in the upcoming mini-Budget of possible new moves to weaken the rand, Minister in The Presidency Trevor Manuel has warned that the absence of sufficient reserves will be a material constraint to meaningful intervention - the Medium Term Budget Policy Statement will be released by Finance Minister Pravin Gordhan on October 27.

Speaking at a governance conference at the University of the Witwatersrand, Manuel said that South Africa's previous attempts at intervention had resulted in the creation of the costly $27-billion net open forward position, "because somebody in the Reserve Bank thought that you could peg the currency against the dollar."

"So, those who continually ask for us to peg [the rand] against the dollar are asking us to moor our ship against a bit of floating timber," Manuel quipped.

South Africa could only succeed, if it had the "power of reserves", as was the position in China which had reserves of some $2,45-billion. "If you don't have the firepower, then I think you whisper."

"[If China] loses a couple of hundred million, it's neither here nor there - it's a rounding error. A country like South Africa, to lose a few hundred million dollars is a vast number," he asserted.

Manuel's comments came as the economic unit at Absa Capital highlighted a range of factors that it said would keep the rand stronger for longer, even in a case where intervention was pursued.

The rand has firmed by nearly 30% against the US dollar since the beginning of 2009, which has raised anxiety levels among policymakers, and has led to some segments within business and trade union movements to call for action to weaken the currency.

An International Monetary Fund (IMF) report estimates that South Africa's real exchange rate could be between 5% and 15% overvalued an even suggested that South Africa should possibly probe the implementation of a tax on financial flows.

Both Gordhan and South African Reserve Bank (SARB) governor Gill Marcus have also expressed concern over the economic fallout arising from the resurgent unit, which is trading at better than R6,80/$1.

Gordhan has indicated that various policy responses are being interrogated to improve currency competitiveness and reduce volatility. But he and Marcus have also indicated that the stronger rand has helped to ease inflation and has contributed to recent SARB decisions to lower interest rates.

A key concern is that any intervention could be costly and could have a limited efficacy, owing primarily to the size of the South African market and the dominance of nonresidents in that market - nonresidents reportedly account for nearly 75% of the daily turnover of between $5-billion and $12-billion in the South African foreign exchange market.

Absa Capital head of macro and fixed income research Jeff Gable noted that, while the debate about currency intervention was a global one, it also had to be acknowledged that "just because the rand is ‘too strong' does not mean it will move weaker any time soon."

Therefore the bank, which is affiliated to Barclays Capital, still expects the unit to trade at around R6,85/$1 over the next six months and only weaken to around R7,30/$1 by the third quarter of 2011.

"Global interest rates are going to remain low for a very long time. Money is going to continue to pour into emerging markets. South Africa will receive it's fair share of that and in that environment, the South Africa rand is going to receive support," Gable outlines.

Nevertheless, the bank has mapped out the various interventionary tools, many of which are being pursued by other countries with mixed results.

Gable said that the possible introduction of a withholding tax on incomes and capital gains made by nonresidents would not be out of line with international trends and would probably not scare off foreign investors in the immediate term.

However, there were administrative costs and longer-term investment risks. It was also not apparent whether such a tax was having the desired effect in those countries deploying it as a tool.

"No doubt, rand strength is causing a lot of pain in South Africa, but the global flows are not interested in that - global flows are trying to pick up yields," Gable highlights, adding that this reality would have to be taken into account as South Africa weighs up the costs and opportunities of intervention.

Absa Capital also does not believe that currency strength will entirely undermine gross domestic growth in 2010 and 2011. It has lowered its growth outlook from 3,3% to 3% for 2010 and expects the economy to expand by 3,7% in 2011.

In fact, the bank says that, while rand will exact a toll on exporters, it could be supportive of South Africa's investment performance in 2011, particularly if more capital is spent on power and transport infrastructure.