South Africa’s rand firmed on Thursday, buoyed by further dollar weakness and pockets of offshore demand, but traders said the gains took place in a very thin market — still spooked by sharp swings in the past week.
At 0930 GMT, the rand was trading ten cents stronger at 10.15 against the U.S. unit — heading for another test of Wednesday’s best level of 10.10.
”We’re seeing very small volumes, although one or two offshore banks are selling dollars — people don’t want to hold big positions after what happened two days ago,” one trader said.
The currency lurched to 10.75/dollar when domestic markets were shut on Monday, ending a sustained rally which has made it the best-performing currency in the world so far this year.
It has since reaped the rewards of gains in the euro — the currency of South Africa’s main trading partner — against the dollar, which floundered to a 17-month low against the European currency on Thursday.
At 0930 GMT the euro was quoted at $0.9588 — just short of the day’s high of $0.9590, after news the White House was evacuated as an unidentified jet circled Washington, raising fears of another attack on the United States.
But many market participants are perplexed about renewed volatility in the rand, which is still 13 percent stronger against a trade weighted basket of currencies so far this year.
Its recovery has wiped out much of its unprecedented losses in the final weeks of 2001, when it dived by 37 percent against the dollar to a record low of 13.85.
”I think the correct level is 10.10 to 10.50 and we’re smack in the middle of that now,” Barclays Treasury head Andy Horne said. ”We’re still getting a bit of support from the weak dollar.”
Markets will eye the central bank’s June quarterly bulletin — due for release at 1500 GMT — closely for further clues on the likelihood of further rate hikes, after last week’s increase of 100 basis points, which took the repo rate to 12.50 percent.
Most analysts believe the increase, which was the third of that size this year, could be the last in the current business cycle, but forward rate agreements are starting to price in another hike — of about 25 basis points so far.
Bond yields weakened on institutional selling ahead of an auction of 600 million rands worth of inflation-linked bonds on Friday and 250 million rands of medium length and long-term conventional maturities on Tuesday.
South Africa’s Trans-Caledon Tunnel Authority said on Thursday it had auctioned 500 million rand of its WS04 bond due in 2016 at a weighted average yield to maturity of 11.88 percent.
Yields on the key R150 bond due 2005 were up two basis points at 11,72%, while yields on the R153 due 2010 were up twelve basis points at 11,91%.
”I think the market was caught a bit long on institutional selling — it could weaken further, I see the 150’s going to 11,82 and the 153s to 11,96%” a Johannesburg trader said. – Reuters