Rand near 5-mnth high, Greece casts shadow

Johannesburg - South Africa's rand hovered close to the previous day's five-month highs against the dollar on Thursday but could come under renewed pressure in coming days as fears of global contagion from euro zone debt problems, particularly in Greece, persist.

Improved risk appetite has lifted the rand by about five percent against the greenback since the start of this after tumbling nearly 23 percent last year as Europe's debt woes drove investors to traditional safe-haven assets, away from emerging markets seen as carrying more risk.

By 15:42 GMT the rand was at 7.6655 to the dollar, just 0.13 percent off Wednesday's close at 7.6555.

Market analysts said the currency's current strong run, which this week saw it reach its highest level since late September last year, could soon run out of steam as the threat of a default by Greece lingers.

"We think that the market also has to digest the likelihood that even once and if the Greece situation is partly solved, Portugal is standing in the wings to kind of take up that place," Bank of America Merrill Lynch analyst Matthew Sharratt said.

"So there's a lot of what we think could be negative news coming from Europe in the weeks and months ahead. We expect to see by the time we get to the second quarter more evidence of a very weak global growth picture and that we think might be negative for markets."

The rand should however find some support from portfolio flows into South African government bonds, which are offering much higher returns compared with near-zero rates in developed countries.

"Inflows into the local bond market by non-residents have remained strong, while the sharp reduction in volatility has boosted the appeal of the carry trade," Standard Bank strategist Nomvuyo Guma said.

On Thursday the yield on the three-year bond closed half a basis point lower at 6.395 percent while that for the 2026 issue gave up seven basis points to 8.065 percent.

The debt market should be propped up by the low probability that the South African Reserve Bank will cut interest rates despite waning economic growth, as it eyes rising inflation.

"The Reserve Bank is likely to keep interest rates on hold this year and possibly even throughout 2013. This means that the local bond market should remain attractive for non-residents as it still offers a relatively high yield," Guma said.