The rand firmed against the dollar in noon trade on Tuesday as it tracked a euro that had recouped its losses following news of the S&P downgrade of Italy.
"We've seen the euro - and therefore the rand - strengthen late this morning but there's been no specific news - it's probably just because European bourses are positive," a local rand trader said.
"What happens next all depends on the euro - yes, the German ZEW investment sentiment data was slightly better than expected and therefore positive for the single currency, but remember that the fundamental factors are still in place," he added.
At 11:34 local time, the rand was bid at 7.6371 to the dollar from its previous close of 7.7023. It was bid at 10.4596 to the euro from 10.4712 before, and at 11.9778 against sterling from 12.0489 previously.
The euro was at US$1.3687 from US$1.3606 before.
RMB analysts said in a note that the European crisis had taken on dangerous new dimensions.
"First, the stability of the eurozone banking system is being increasingly questioned. This morning there are stories on how large European corporates and Chinese state-owned banks are cutting exposure to banks exposed to the PIIGS's debt.
"Secondly, the big change is that capital has started to flood out of emerging markets (EMs)."
EM equities lost 2.8 percent yesterday against only 1.8 percent for developed markets and bond spreads were starting to spike, RMB added.
"We saw local signs of this selling last week when foreigners dumped R10bn local bonds in two days before returning but we are also averaging around R1bn outflows per day from the equity market.
"It seemed in the early part of this crisis that emerging markets had suddenly emerged - i.e. they were being treated on their own merit, not simply lumped as a risky asset - but it seems that the old relationships are staring to reassert and they are back to submerging in time of stress."
Meanwhile Dow Jones Newswires reported that in currency markets that the euro had recovered losses it made on the S&P downgrade of Italy, supported by the positive tone in equity markets.
European stock markets edged higher on Tuesday, shrugging off the Italian downgrade. Instead, investors picked up recently battered stocks ahead of the second leg of Greek aid talks with international lenders later in the global day.
Bonds bolstered by stronger rand
South African bonds were a few pips firmer in midday trade on Tuesday, mainly in line with the stronger local currency.
By 11:50, the benchmark R157 bond was trading at 6.900 percent, from its previous close of 6.970 percent. The R207 was bid at 8.040 percent and offered at 8.020 percent from 8.110 percent and the R186 was trading at 8.380 percent from its close of 8.400 percent.
The rand was bid at 7.6199 against the dollar from its previous close of 7.7023.
"We're firmer on the rand. The euro has obviously made some ground against the dollar and the rand is doing the same - so bonds are better bid. It's pretty much a rand story at the moment and will continue to be until we know what's happening out of Greece," a trader said.
At its weekly auction, the received bids totalling R2.20 billion for R1.1 billion worth of R186 bonds at a clearing yield of 8.350 percent and bids totalling R1.86 billion for R1 billion worth of R214 bonds at a clearing yield of 8.540 percent.
