Rand and local bonds extend rally on ‘technical correction’

The rand and local bonds extended their rally on Wednesday afternoon after softer than expected inflation data supported the local currency in what analysts call a “technical correction”.

Earlier, the rand broke through R14.65 to the dollar for the first time since the end of August, with the market taking the view that the it had been oversold. It is, however, still 18% weaker for the year, but is some way off its worst level of R15.69, reached on September 5.

Globally, excess dollar liquidity is still expected to pressurise emerging-market currencies. “But pressures have abated in the short term, likely providing a brief relief to risk-on assets in the near term,” said Nedbank analysts Neels Heyneke and Mehul Daya in a note.

They said the rand was likely to test R14.60, which represents an important resistance level. Should the euro gain further ground to $1.20, it is likely that the rand could hit R14, according to the technical analysis.

Inflation grew at a slower rate of 4.9% year-on-year in August, from 5.1% in July, Stats SA said in a statement. The benign inflation figures could help take pressure off the Reserve Bank, whose monetary policy committee is scheduled to announce its decision on interest rates on Thursday.

At 2.58pm, the rand was at R14.6356 to the dollar, from R14.8917. It was at R17.0906 to the euro from R17.3790, and at R19.2291 to the pound from R19.5817. The euro was at $1.1678 from $1.1670.

The yield on the benchmark R186 bond was at 9.060% from 9.205%, an attractive level for foreign investors, with German bund yields at less than 0.5%, while Japanese bonds offer almost no return at all. The US 10-year treasury bond was last seen at 3.0546% from 3.0564%.

Indications are that higher bond yields are enticing buyers, which include offshore investors, Nedbank said. Outflows from the bond market continued last week but the rate has slowed, with foreign investors selling just a net R0.87bn.

In September, so far, foreign selling has been concentrated in the equity market with R7.5bn in net outflows, while the bond market has seen just less than R2bn leaving the country.