The third quarter was highlighted by extreme volatility and risk aversion on both local and international fronts. Wall Street collapsed amid the banking crisis, while oil came off a peak of $145 per barrel in July and retreated to $89 per barrel.

The rand took a knock due to the turmoil on the international front, as investors became more risk disinclined and weakened significantly, ending off the quarter at R8.24 to the dollar. The key risks posed to our currency now are the global conditions (and the length of this crisis) while the other concern for the rand will be how the political transition in the South Africa plays out next year with the elections.

Our current account deficit continues to be of concern. South Africa has become very reliant on capital inflows to finance this deficit. Data up until August shows there have been outflows to the value of R13 billion rand in the equity and bond markets. The current turmoil may add further pressure to the current account.

The SARB MPC left the repo rate unchanged in August, amid shocking inflation data. Once again CPI was above expectation, surging to a record13.7% y-o-y at the end of the third quarter. Inflation has not been in the target range since March 2007, while the SARB hiked the repo rate by 500basis points ostensibly to counter inflation. PPI accelerated to 19.1% but is less likely to impact future CPI data under the new methodology (to be adopted in January 2009). All this said, rates are likely to remain unchanged for the next two quarters.

The fund has maintained a short-term re-pricing strategy. The expectation of further rate hikes in the first half of the third quarter benefited the fund as it maintained a short-duration strategy. In preparation of a possible change in the interest rate cycle, the fund has continued to increase its duration.

The fund continues to be exposed largely to banks (89% at the end of the third quarter) while 11% of the fund is in Government securities or short term corporate debt.

Any further impact from the global financial crisis remains a concern, albeit muted since local banks are largely insulated. Local inflation indicators will also be closely monitored and appear still to be the main driver to the SARB's MPC decision. The fund will continue to look for opportunities that may arise in the possible change in the interest rate cycle.

The past quarter has been a particularly eventful one. A record ninth 50 basis points (bp) interest rate hike at the April MPC was followed by another 50bp by the SARB in June. The repo rate now stands at 12%.

Inflation, as measured by CPIX, was again above market forecast with inflation data over the past quarter rising further, driven by increased fuel and food prices. International oil prices continued rising and heading towards $150 per barrel. The additional impact of the impending electricity tariff hike will add to the further deterioration of inflation.

Producer Inflation, as measured by PPI, shocked on the back of rising steel prices, increasing from 12.4% y-o-y to 16.4% y-o-y.

Private Sector Credit Extension (PSCE) was relatively stable as higher interest rates are impacting.

On a positive note, the trade deficit for May shrunk to R1.7 billion (from R10 billion), but the current account deficit still remains a large threat to the local currency. The local currency remains highly volatile and ended the quarter weaker.

The fund has maintained a short-term re-pricing strategy and the expectation of further rate hikes has benefited the fund. The fund is ideally positioned for the existing market scenario and thus the yield is likely to continue to rise.

The fund continued to be exposed largely to banks (85% in March vs 89% in June) while 11% of the fund is in Government securities or short-term corporate debt.

While the SARB only hiked the interest rate by 50bp at the last MPC meeting, the bias remains toward rising rates. Consequently, the short duration strategy will be maintained.

Analysts are split on the outcome of the April South African Reserve Bank (SARB) Monetary Policy Committee (MPC) meeting. Based on inflation targeting only, the SARB will raise the repo rate again. However, the consumer is already feeling the pinch as the rising international oil price together with a weakened local currency, continue to impact. Another rate increase will do little to constrain this impact and will be more like a killer punch, as consumers will struggle with the additional interest payments. This is the argument against a rate hike, which is against a backdrop of rising inflation and a moderation in private sector credit extension.

The local currency is showing weakness against all currencies and has deteriorated against the American dollar by 15.7% during Q1 2008.

Money market rates increased further as risks remain for a possible further hike.

The fund has maintained a short-term repricing strategy and is benefiting from the negative market sentiment fuelled by speculation on inflation. The fund is ideally positioned for the existing market scenario and the yield is likely to continue to rise.

The fund continues to be exposed largely to banks (85%-March vs 76%-Dec) while 15% of the fund is in Government securities or short-term corporate debt.

The SARB may take a moderate stance and leave rates unchanged at the April MPC meeting. Market rates will likely remain high. The fund's current structure, reflecting a short-term re-pricing strategy, is ideally positioned for this scenario.

The quarter was marked by a further two rate hikes (50bp each) as inflation-targeting remains on the centre-stage. Higher international oil prices and the increased electricity costs are seen as the protagonists in the SARB's inflation forecast. The repo rate has been hiked at the last four MPC meetings totalling 200bp.

Inflation, as measured by CPIX, continues to rise, but is set to peak in the, first quarter of 2008, although it will remain outside the target range for the first half of 2008. There was some improvement in credit extension since the previous quarter.

The local currency has been stable against the US dollar, but the threat of higher international oil prices remains a concern.

The fund has maintained a short-term repricing strategy. The fund has benefited from the two rate hikes over the last quarter and the continued bearish market sentiment. The fund is ideally positioned for the existing market scenario and the yield is likely to continue to rise. The MPC may decide to leave rates unchanged at the January MPC, which may signal that rates will be flat for a while. The risk remains though on the upside and we will continue with the short-duration strategy.