The Rand has climbed to its strongest level against the US Dollar in more than five weeks due to bond rally helping to prop up the South African currency.
The currency has benefited in recent days from a weaker US Dollar and as yields on South African benchmark bonds traded close to record lows yesterday which in turn created a rally that supported the Rand.
Offshore investors are historically keen on the 10-year yield space, which has seen the 2026 yield outperform the shorter-dated benchmark 2015 note and the yield spread between the two bonds narrowed to a historical 170 basis points this week.
The rally has caused Analysts to expect that the rally could be overdone. They are also concerned that local economic factors such as the nation’s massive current account deficit could cause portfolio inflows to reverse, a move that would cause the Rand to weaken once more.
“There’s been a substantial rally. It’s not likely to continue day after day; we don’t expect any more excitement in either direction from here on,” said Jeff Gable of Absa Capital.
The Rand could also retreat from its current levels if the Euro crisis flares up yet again. This time concern has shifted to Slovenia which observers are saying could potentially turn into the next Cyprus. With Europe being South Africa’s largest trading partner any adverse movements in the Euro often affect the Rand.
The next key piece of data for the currency is Thursday’s release of the latest manufacturing data which is expected to confirm that the nation’s economic recovery is stalling.
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