South Africa's rand pulls back from rally, range-trading expected

JOHANNESBURG (Reuters) - South Africa's rand weakened against the dollar on Wednesday, extending losses prompted by worse-than-expected current account data in the previous session and pulling yields on government debt higher. The South African Reserve Bank released poor current account data on Tuesday, showing a widening trade account as Africa's biggest economy continued to import more than it exports. The rand reacted by falling through 10 to the dollar, and was down 0.55 percent at 10.0345 at 0618 GMT on Wednesday. "Global sentiment remains very positive but the rand has been held back by the current account deficit and an unimpressive performance from its compatriot currencies," Rand Merchant Bank currency strategist John Cairns said. The current account deficit is a sore point for the rand, making South Africa vulnerable to shifts in global investor sentiment since the account is funded by offshore inflows. "It creates huge risks that the rand could blow out and restricts the unit's ability to stage a significant recovery. Our core view is for a mild recovery from these oversold levels," Cairns added. With a week to the U.S. Federal Reserve's next policy meeting, investors are likely to play it safe by staying away from risky assets such as the rand until they get clarity on whether it will start reducing its bond-buying programme. Manufacturing data for July, due at 1100 GMT, is likely to add further pressure on the rand if it underperforms market expectations. Output was at 0.4 percent year-on-year in June from 2.1 percent in May, and fell 3 percent on a month-on-month basis. Economists expect a pick-up to 1.5 percent year-on-year and 2.6 percent month-on-month, mainly because of an upbeat Purchasing Managers' Index (PMI) number. The PMI, a leading indicator of manufacturing activity, rose in July and hit a six-year high in August. Yields on government bonds were up four basis points to 8.365 percent on the benchmark 2026 bond. Treasury will announce issuance plans for its weekly bond sale of fixed income debt at 0900 GMT.