Rand weakens, tests R8.28 support

Johannesburg - The rand weakened against the dollar early on Wednesday, coming off a surprise gain in the previous session with investors still unsure about the global economy and ahead of inflation data that could see the market pricing in another rate cut in September.

Risk appetite on hopes European authorities will take steps to stem the eurozone debt crisis buoyed the rand on Tuesday. However, dealers now see the move as a small correction and unlikely to be sustained. 

By 06:40 GMT on Wednesday, the rand was down 0.3% to R8.2850, undoing previous gains to break through the R8.28 support that opens it up for further weakness. It closed at R8.2625 in New York on Tuesday.

“The dollar-rand ended up in late trade at 8.26. That indicates that rand bulls lost traction and R8.17 - R8.40 is my consolidation. The trend still remains for a weaker rand,” said Judy Padayachee, technical strategist at Absa Capital.

Analysts expect even weaker levels on the rand as global factors such as the eurozone crisis, which have driven it weaker recently, continue to weigh on emerging market assets seen as risky.

If inflation data due in this session comes in lower than expected, the rand may weaken further away from R8.28 support.

July inflation data due at 08:00 GMT will give clues about the inflation trend with concerns about food prices as agricultural futures spike up in adverse weather conditions around the world, including the worst drought in more than 50 years in the United States.

Economists in a Reuters poll expect inflation eased to 5.2% in July from 5.5% in June.

If the data comes in below 5.2%, the market could price in another interest rate cut after a reduction last month, which would weigh on the rand.

Government bonds were still supported by a successful bond auction on Tuesday and yields dropped three basis points each in early Wednesday trade.

The 2026 issue was at 7.525% while the 2015 paper extended gains to a two week high of 5.54%.

The Treasury will announce issuance plans for next week at 09:00 GMT while power utility Eskom will release results of its sale of 2028 inflation-linked paper after 09:00 GMT.

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