JOHANNESBURG: South Africa's rand firmed to its strongest level in three days against the dollar on Wednesday after Moody's rating agency affirmed Spain's investment grade rating, calming fears Madrid would be downgraded to junk status.
However, the rand is likely to have its gains capped as investors worry about the domestic labour unrest that has plagued South Africa since August.
The rand strengthened to as much as 8.6645 in early trade from a New York close of 8.6880 on Tuesday.
"It is somewhat of a relief that local markets have taken direction from developments abroad given the domestic mining turmoil," research house Tradition Analytics said.
"The change of focus is however likely to be temporary as the tensions in the mining industry rage on."
The rand was at the bottom of the gainers against the dollar in a basket of 20 emerging market currencies tracked by Reuters.
Government bonds rose, especially on the longer end, which was boosted by a successful Treasury auction on Tuesday.
The yield on the 2015 bond dropped three basis points to 5.38 percent, while that on the 2026 issue gave up 5 basis points to 7.685 percent.
Longer-dated bonds had been pressured by a downgrade of South Africa's credit rating on Friday, which drove the R186/R157 yield spread to a lifetime high on Monday.
However sentiment improved after the Tuesday auction which saw foreign and local investors return to search for yield, which instilled a little confidence in South Africa and propped the rand.
The spread has come back from a 239 basis point peak to 230 basis points on Wednesday.
Retail sales for August are due at 1100 GMT and economists expect a slight improvement to 4.6 percent growth in August, compared with 4.2 percent previously.
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