JOHANNESBURG: South Africa's rand bounced from two year lows against the dollar on Thursday but remained vulnerable as investors dumped high risk assets, doubtful that the US Federal Reserve's action to buy long term debt was enough to boost the economy.
Global markets and emerging market currencies fell after the US Fed highlighted "significant downside risks" but stopped short of more aggressive measures to boost growth, and the dollar gained across the board.
The rand recorded its biggest daily fall since October 2008 to hit two year lows at 8.33 overnight.
Its sharp weakness will likely feature prominently in the Reserve Bank's monetary policy committee statement at 1300 GMT after its three-day meeting deliberating on interest rates.
The South African Reserve Bank (SARB) is expected to keep the repo rate at 5.5 percent and likely struck a dovish tone on the domestic economy and cut its growth forecasts.
"At this stage, we see growth concerns and deteriorating external conditions weighing in more so than any inflationary pressures in SARB's rate setting policy," Danske Bank said in a research note.
"Significant worsening of growth outlook and external conditions could in fact compel SARB to engage in rate cuts and/or other forms of monetary loosening," it said.
Indeed, money markets have factored in a small chance of a repo rate cut late this year or early next year but the sharp rand depreciation may limit further monetary loosening actions.
Gina Schoeman, senior economist at Absa Capital, said the Reserve Bank may want to see how long rand weakness will be sustained before making a move.
She added that monetary policy was already accommodative and rates will likely remain stable for longer.
The rand was trading at 8.1760 to the dollar, 1.5 percent firmer than Wednesday's New York close of 8.30.
Government bonds followed the rand's losses, wiping out the previous session's gains that were prompted by softer than expected inflation data.
Yields, which move inversely to the price, climbed. The yield on the 2015 bond went up 15 basis points to 7.02 and that on the 2026 note was up 9.5 basis points to 8.51 percent.
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