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Rand Rebounds From 5-Month Low as Charts Signal Decline Overdone

The rand gained, rebounding from a five-month low against the dollar, as technical indicators signaled its recent decline had come too fast. Bonds gained as investors trimmed expectations of an interest-rate increase.

South Africa’s currency advanced 0.1 percent to 8.3251 per dollar, paring its retreat this week to 2.7 percent, the worst five-day performance since April 6. The yield on the nation’s 6.75 percent bonds due 2021 dropped for a third day, falling 11 basis points, or 0.11 percentage point, to 7.63 percent.

The 14-day relative strength index for the rand against the dollar fell to 26, the lowest since September. It has been below the “oversold” 30 level every day this week. The rand’s stochastics oscillator fell to 8, also below the 30 threshold that signals it may be oversold. The South African currency today failed to break through a so-called resistance level, where traders cluster orders to buy the currency, at 8.45 per dollar, according to George Glynos, an economist at Johannesburg-based ETM Analytics.

Failure to breach 8.45 per dollar may trigger a “strong reversal” for the rand, Glynos said in e-mailed comments. “The rand remains undervalued relative to base fundamentals” though markets remain “in fear mode”, he added.

The rand declined as much as 1.3 percent in earlier trading, tracking falling equity markets and a weakening euro as Europe’s debt crisis worsened, curbing appetite for riskier assets.

Equity Losses

Almost $4 trillion has been wiped from global equity markets this month as Europe’s deepening crisis threatens the global recovery. Moody’s Investors Service lowered debt assessments of 16 Spanish banks, while Fitch Ratings cut Greece’s credit rating on concern the country may not be able to sustain euro membership.

“With risk-off sentiment continuing to rise, the rotation towards safe-haven assets will continue to benefit the dollar, while the euro continues to slide, along with commodity prices and commodity currencies,” Nomvuyo Guma, a currency strategist at Standard Bank Group Ltd. in Johannesburg, said in e-mailed comments. “With developments in Europe still the main driving force, further weakness is in the offing” for the rand, she wrote.

The euro sank to a four-month low against the dollar, depreciating as much as 0.3 percent. The rand often moves in tandem with the euro as the euro region is South Africa’s largest trading partner, accounting for 22 percent of the country’s exports last year, according to government data.

The Federal Reserve Bank of Philadelphia’s general economic index slid to minus 5.8 in May, the lowest reading since September. Data today showed China’s home prices fell in a record number of cities in April.

Local Bonds

Local-currency bonds gained as investors pared bets on a central bank interest-rate increase in the next year. Forward-rate agreements starting in 12 months dropped 10 basis points today to 5.67 percent, the lowest since January.

The yield difference between inflation-linked bonds maturing in 2013 and fixed-rate notes of similar maturity dropped 2.5 basis points today to 6.12 percent, indicating traders are tempering inflation expectations as the euro-region economy falters.

“The fragile situation in the euro zone continues to be the dominant driver in our market,” Thando Vokwana, an analyst at Rand Merchant Bank in Johannesburg, said in e-mailed comments.

The yield on South Africa’s $1 billion of 5.875 percent bonds due 2022 climbed one basis point to 4.03 percent, widening the extra yield investors demand to hold the debt rather than U.S. Treasuries by five basis points to 228 basis points.

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