South Africa’s rand retreated off its best levels in four weeks on Friday, after firming dramatically in offshore trade in the wake of the central bank’s decision to raise interest rates.
At 0705 the rand was trading at 10,49 against the dollar after touching 10,41 early in the session — which was 20 cents firmer than its Johannesburg close and its best level since August 16, according to Reuters data.
Dealers said that players were forced to unwind long dollar positions after unsuccessfully trying to push the unit through 10,65/dollar on Thursday. For the moment, it was likely to remain within its firmer range, they said.
”I think we’ll drift up to 10,50 then slowly drift lower to 10,41 again. If we manage to break 10,42/43, we will target 10,39 and if we get through that we could go to 10,30,” a Johannesburg trader said.
On Thursday, South Africa’s central bank lifted its key repo rate by 100 basis points for the fourth time this year, taking it to 13,50%. Commercial banks quickly followed suit, increasing their prime lending rates by one percentage point to 17%.
Analysts are divided on the wisdom of the move, which the central bank hopes will quash soaring domestic inflation without hitting economic growth.
Traders said the rate hike increased the cost of carrying long dollar positions, but if the rand weakened back to 10,55/60 in spite of it, 11/dollar would be on the cards once again.
The yield on the most-traded R150 bond, due 2005, was still mired above 12/dollar after leaping 22 basis points immediately after the announcement.
The yield on the long-dated benchmark R153 fell another six basis points, firming to 11,61% as investors switched out the shorter dated maturity.
Many analysts fear that further interest rate hikes are in the pipeline, as inflation triggered mainly by the rand’s plunge late in 2001 shows no sign of abating. – Reuters