JOHANNESBURG: South Africa's rand hit a month high against the dollar on Wednesday after breaking through a resistance level, and government bonds gained as markets expected further monetary stimulus out of the US Federal Reserve.
Bonds were also buoyed by expectations that May inflation will have eased back into the central bank's 3-6 percent target in May due to a drop in fuel prices.
The 2015 bond yield was down 2.5 basis points at a new record low of 6.025 percent while the 2026 paper dropped four basis points to 7.985 percent.
Economists have forecast annual inflation at 5.95 percent from 6.1 percent in April, while on a monthly basis prices are expected to have stayed the same in the two months. The data is due at 0800 GMT.
Longer bonds have been outperforming the shorter end of the yield curve in the past few sessions after a three-week rally of the short-dated stock. Dealers say the front end now looks too expensive and yields maybe rallied too fast and too quickly. The R186/R157 spread was retracing its peak from last week.
The spread was at 196 basis points and the break through 200 basis points opens up 185 basis points, technical analysts say.
The rand was up 0.2 percent at 8.1849 to the dollar at 0630 GMT, from a 8.20 close in New York on Tuesday. Local dealers will watch the Federal Reserve monetary statement after local trade closes this evening, which is likely to see the rand reacting in overnight trade.
"In the meantime the rand remains strong with the kind of a risk-on rally we've seen over the last couple of days. We've seen it strengthen very nicely from the 8.40 area down to sub-20 and as long as risk-on remains the rand will be stable to stronger," said RMB trader Jim Bryson.
If no stimulus is announced by the Federal Reserve as the market expects, local dealers say the rand could bounce back to 8.35. On the firmer side, 8.05 are next on the cards. A breach of that would in turn open up the big 8 rand level.
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