Rand firms after rates decision

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Photo: Filomena Scalise

Johannesburg - Yields on shorter-dated South African bonds rose on Thursday after the central bank left interest rates unchanged and sounded a less dovish tone than some market players had anticipated.

The front end of the yield curve ended four basis points higher, at 5.51 percent on the three-year bond.

Some speculators had bet on the central bank cutting rates, with South Africa's economy dogged by high unemployment, gaping current account and budget deficits and labour unrest stirring in the agriculture sector after three months of violent strikes in the mining sector.

“Mining output has declined significantly as a result of work stoppages and there are likely to be longer term implications for output, export and employment as the mines adjust to higher labour costs,” the bank said as it trimmed its growth forecast for 2012 to 2.5 percent from 2.6 percent.

The bank held its key interest rate at a 40-year low of five percent at its last policy-setting meeting of the year.

“The curve did flatten with the front end losing a little bit of ground. A very, very slight outside chance (of a rate cut) was probably priced into the short end of the curve,” said Ashley Dickinson, a bond trader for Renaissance Capital.

Dickinson added that the curve flattening was also due to the slightly hawkish outcome of the central bank governor's news conference.

The bank expressed some concern about expected higher inflation from food prices and the rand's recent depreciation.

The local unit has lost 11 percent against the dollar since the start of the year and tumbled to a three-and-a-half year low on Wednesday as stop-losses triggered a fall all the way to 9.01/dollar.

The central bank said the rand was expected to remain sensitive to both domestic economic and political developments, in addition to its vulnerability to global risk sentiment.

“The rand is expected to remain volatile and subject to overshooting and its depreciation poses an upside risk to the inflation outlook,” the bank said in a statement.

On Thursday the rand initially firmed to its best level in the session of 8.9130 immediately after the rate decision, but had come back slightly to 8.94 by 15h50 GMT.

Dealers expect liquidity to remain thin as the year draws to a close, resulting in exaggerated moves on the currency, while the bond market will likely take its cue from the rand.

“We'll have thin liquidity for the remainder of the year,” said Renaissance Capital's Dickinson.

“We're seeing guys almost calling it quits for the year already. - Reuters


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