May 28, 2004

Johannesburg - The bond rally halted abruptly yesterday after news that the producer price index (PPI) performed worse than expected in April, rekindling market concerns that interest rates would rise later this year.

But the rand nudged firmer after appreciating by about 3 percent against the dollar this week on recovering commodity prices, the broadly weaker greenback and the successful launch of a government eurobond.

Traders said remarks from central bank governor Tito Mboweni had fanned concern over the possible impact of higher oil prices on domestic inflation, dampening hopes that interest rates might be left on hold in 2004.

"The PPI data and central bank comments stopped the bond rally in its tracks," a senior domestic dealer said.

"If oil prices stay at $40 a barrel or above it will put pressure on inflation, but I don't think we'll get rate hikes to the extent that people expect. We will probably get one in October or December."

Bond yields had strengthened on Wednesday after the targeted measure of consumer inflation came in at a better-than-expected 4.4 percent in April, unchanged from March.

But yesterday's PPI data for the same month sent a different message, with the overall index declining by 0.2 percent, which was much slower than expected, after a 1.2 percent fall in March.

Bonds retreated off their best levels and were mixed by 5pm. The yield on the R194 was bid 1.5 basis points better at 9.875 percent after initially firming to 9.83 percent. The yield on the R153 weakened 0.5 basis points to 9.955 percent after improving to 9.88 percent.

The rand was little changed, closing 0.2c weaker at R6.5688 to the dollar after touching a new five-week peak of R6.54.

Dealers said the US unit was likely to remain stronger than the key R6.55 to R6.53 level, given the central bank's policy of gradually buying dollars to build its meagre foreign exchange reserves.

Mboweni said yesterday that the bank's net reserves, or international liquidity position, stood at about $7 billion, up from $6.4 billion at the end of March.

But further gains in the euro could give the rand fresh impetus. At 5pm the euro was fetching $1.2263, versus $1.2161 when the local market opened yesterday.

The rand was "in a fairly tight range, but the market is sitting short of dollars", a London-based dealer said. "It will probably stay between R6.53 and R6.65."