JOHANNESBURG: South Africa's rand held firm against the dollar on Thursday and government bonds ticked up in early trade although the debt market's gains might not be sustained in the long-term as traders price in higher interest rates next year.
The rand was at 7.72 to the dollar by 0655 GMT, up 0.1 percent from Wednesday's close at 7.7275 and within sight of the previous day's four-week high of 7.707.
But the currency remains vulnerable to a gloomy economic outlook for Europe. South Africa has close trading links with the region and the rand tends to track the euro, which hovered near a two-week low against the dollar in the aftermath of recent weak data.
"Yesterday's unemployment data from Europe makes for horrible reading. This recession is proving a lot deeper and longer than we expected a few weeks ago. This is a terrible environment for the rand," RMB analysts John Cairns and Josina Solomons said in a note.
"For now, this rand is looking way too strong."
Government bonds extended the previous day's gains, with the yield for the benchmark three-year bond falling three basis points to 6.37 percent while that for the longer-dated 2026 paper was 1.5 basis points lower at 8.12 percent.
"Yesterday was quite a strong day for bonds. I think a catch up to market liquidity returning after the holiday and yields went low all the way across the curve," said Chris Becker, a market analyst at ETM.
But while further gains were possible in the short term, the bond rally might run out of steam in the long term, Becker said.
"The market is going to continue to price in interest rate hikes and as that comes through on very short term interest rates like FRA's (forward rate agreements) it will tend to keep bond yields where they are, to slightly higher," Becker said.
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