Rand, bonds weaken ahead of MPC

2012-03-27 18:21

Johannesburg - Government bonds weakened for the first time in three days and the rand reversed earlier gains against the dollar on Tuesday, although the currency’s carry trade appeal could boost it in the short term.

The rand earlier rallied to R7.5484 to the greenback, its firmest level since March 20, but retreated to R7.5980 in early evening trade, weakening 0.21% from Monday’s close at R7.5820.

“The rand has been somewhat range bound today, trading between the low 7.54s and the current levels,” said William Van Rijn, a forex trader at Nedbank, calling Tuesday’s session rather lacklustre.

“Locally the focus will be on the outcome of the monetary policy committee on Thursday , and perhaps more specifically on the comments from the governor.”

All 24 economists polled by Reuters last week expected the Reserve Bank’s MPC to keep the key repo rate unchanged at 5.5% - its stance over the last 16 months - but the market will be looking for a signal from governor Gill Marcus’ speech of when monetary tightening could resume.

Government bonds fell earlier this month after comments from Marcus suggested a tougher stance on inflation and some market players are seeing higher interest rates by year-end, despite data showing the consumer price index slowed unexpectedly in February.

Bonds were sold on Tuesday, pushing prices lower and nudging the yield on the benchmark three-year bond 4 basis points higher to 6.79%. The yield for the 14-year paper added 5.5 basis points to 8.43%.

A weekly debt auction for R2.1bn worth of paper saw lower bid-to-cover ratios for longer dated paper, suggesting players would rather stay on the sidelines until Thursday’s rate decision.

Traders said the rand still has potential for short-term gains, with the US Federal Reserve suggested a continued accommodative monetary stance as the world’s biggest economy remains fragile, which should boost carry trade investment into high yield currencies.

“We remain constructive on the local currency and as long as we can stay below the 7.6300-6400 level against the dollar, we could see a move to the low 7.40s short term (one to three days),” Absa Capital trader Duncan Howes said.