Rand firmer but tracking jittery euro

After weakening sharply, the rand was firmer against the US dollar versus its overnight levels.

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After weakening sharply on Tuesday, the rand was firmer against the dollar versus its overnight levels in early morning trade on Wednesday as it tracked a jittery euro that had hit an almost 12 month low overnight. However, rand weakness was expected for the day's trading session.

“The massive move in the dollar rand back to 8.37 last night was on the back of the euro and it's the single currency that'll keep the rand on the back foot,” a local currency trader said.

“The markets will be driven by rumours out of Euro land and there is a real possibility that there'll be downgrades on some European countries - so the risk on the euro is to the downside,” he added.

“If dollar rand goes further than 8.38, then we'll soon be looking at 8.43 in a very volatile market.”

At 08:25 local time, the rand was bid at R8.3270 to the dollar from its previous close of R8.3636. It was bid at R10.8579 to the euro from R10.8904 before, and at R12.8891 against sterling from R12.9391 previously.

The euro was bid at US$1.3041 from its previous close of US$1.3017.

RMB analysts said in a note on Wednesday morning that the euro had fallen sharply against the dollar to an 11-month low and within spitting distance of the 1.30 level.

“Dollar rand has been dragged along, first dropping to 8.30 when most of you were already on your way home and then later all the way to 8.37.

“While conditions are once again a little calmer this morning, a break of euro dollar 1.3000 would send all risky assets spiralling. We have a light data calendar but a key Italian bond auction, so risks remain elevated.”

RMB added that Chancellor Merkel had, rumours suggested, ruled out increasing the new permanent bailout fund size past the currently agreed 500 euro billion.

“No more money for bailouts it seems.”

RMB said the Fed had also disappointed.

“It expressed a little more optimism about the economy, but there were no hints of a new round of QE3. No more money for the banks it seems.”

According to RMB, the big event of the day would be the Italian bond auction.

“Other European debt issues this week have gone surprisingly well. Bank stress is very evident, however, and it's one thing buying short-dated debt; it's another altogether buying the longer-term bonds.”

Meanwhile, another fiscal crisis is brewing on the other side of the Atlantic, RMB said.

“Once again, ideology is seeing Democrats and Republicans at loggerheads over the budget and, once again, threatening the closing down of the government.”

SA consumer inflation would present a small risk.

“While the rand usually isn't too concerned with domestic data, today will see us breach the 3 - 6% inflation band - we expect we'll see 6.2%.

“This doesn't, though, alter the rate view all that much given that the SA Reserve Bank is probably focussed more on the weakness of the economy and the threat from instability offshore and so will likely look through this inflation hump.”

The CPI - the measure used by the SA Reserve Bank for its inflation target - is expected to edge up slightly to 6.2% year on year (y/y) in November from the unexpected 6.0% y/y seen in October, according to a survey of leading economists by I-Net Bridge. Forecasts among the 11 economists ranged from 6.1% to 6.4%.

Meanwhile Dow Jones Newswires reported that the euro was mostly flat in static Asian trading on Wednesday after tumbling overnight to its lowest level in nearly a year, but traders said the single currency looked set to slide further as there was no silver bullet for the euro zone's debt woes.

“It's a matter of time” before the euro falls through the US$1.3000 mark, said Dai Sato, senior vice president of the foreign exchange division at Mizuho Corporate Bank. “The question is how much further the euro will fall below that.”

Sato said the next target could be around US$1.2860, the lowest level seen so far this year, set back in January.

“At the same time, there is a feeling the euro may find a near-term bottom amid fresh developments if European and US stocks rebound, even though there is a risk of a sudden fall due to concerns over the possible downgrading of euro zone countries,” he added.

The euro took a hit overnight after German Chancellor Angela Merkel expressed her opposition to raising a 500 billion euro lending limit for the permanent euro-zone bailout fund, the European Stability Mechanism, which is due to come into operation in July 2012.

“The comments contained no surprises, but came at a bad time,” Mizuho's Sato added.

Traders said euro bear sentiment could persist unless Germany and the European Central Bank stepped up their contributions to efforts to put an end to the crisis.

“But such changes are unlikely to occur soon,” Sato said.

Traders would keep a close eye on an Italian bond auction later in the day, as well as EU industrial production data for October. - I-Net Bridge

Source: http://www.iol.co.za/rand-firmer-but-tracking-jittery-euro-1.1198435

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