The rand was over 1% firmer against the dollar in early morning trade on Thursday, after the euro strengthened following Wednesday’s EU summit.
"The summit’s decision seems to have satisfied a few people and the markets seem quite happy," a local currency trader said.
"The rand is in ranges as it reacts to the bolder euro and we see an initial dollar rand range of 7.80 to 7.90, although this market will still be headline driven.
The trader added that the plan appeared to be "reasonable enough and the short-term crisis seemed to be over."
At 08:20 local time, the rand was trading at R7.8464/$ from its previous close of R7.9356/$. It was trading at R10.9850/€ from R11.0307/€ before, and at R12.5548/£ from R12.6603/£ previously.
The euro was at $1.4007 from $1.3875 before.
RMB currency strategists said in a morning note that the European summit deal was in line with expectations, which was enough to take the rand back from the edge of the cliff but did not resolve all the problems.
The bottom line is that it was mildly positive for the rand in the short-term but it looked like volatility would continue for multiple months — probably even into next year, RMB added.
It said that the deal had three components, all in line with expectations.
"The remaining capital (around €250bn) in the eurozone bailout fund will be leveraged 4 — 5 times through providing insurance guarantees and the introduction of a special purpose vehicle. If you don’t understand what this means, then you are in good company but Eurozone officials are saying that this implies that the bailout fund now has over a Eur 1trillion in firepower."
Furthermore, Greece’s creditors would write off 50% of the debt through voluntary exchanges but this would be offset by €30bn in credit enhancements provided by the bailout fund.
Thirdly, eurozone banks would be recapitalised, with the process due to finish by June next year.
RMB said the markets had taken the deal as a mild positive.
"US equities rallied as the news came out — the positive sentiment looks like it will remain into today and possibly through the next few days’ trade.
"Most encouragingly for the ZAR, EUR/USD rallied nicely to test up at the 1.4000 level. Overnight USD/ZAR moves have been relatively constrained, with moves back from 8.00 to under 7.90. Downside moves could persist but the initial global reaction suggests there isn’t the impetus to go through 7.78 yet."
RMB said that the deal would not resolve all of Europe’s problems.
"This was a good summit but not the magical solution that had been hoped for. Unfortunately this implies that Europe still remains in trouble."
The implication was "pretty obvious" - the markets might have a few days of positive spin but ultimately it appeared that uncertainty would continue.
"This doesn’t change our forecast that the rand will be able to recover most of its lost ground next year but it extends this period of volatility in which upside risks on USD/ZAR remain high."
Meanwhile Dow Jones Newswires reported that the euro jumped to a seven-week high against the dollar and gained against the yen after European leaders ended a marathon meeting with an apparent deal on Greek debt and a roadmap for the expansion of Europe’s emergency bailout fund.
The yen rose after the outcome of the Bank of Japan’s policy board meeting underwhelmed investors. The board announced a ¥5 trillion increase in its asset-purchase program, in line with market expectations, which many analysts saw as a conservative step that would likely fail to curb the soaring currency.
French President Nicolas Sarkozy declared that talks with private-sector lenders had produced a "durable solution" to the Greek crisis, with an agreement by private investors to accept a 50% write off on their holdings of Greek debt. The private-sector involvement had been a critical issue in the dispute.
As part of the agreed package, the European Financial Stability Facility is expected to be leveraged four to five times, to around €1 trillion, although further talks were necessary, officials said.
However, markets remained somewhat sceptical over the summit outcome and euro’s outlook, however.
"They are so good at presenting things like this, but they’ve just bought some time and the debt issues are still far from over," said Masanobu Ishikawa, a senior dealer at Tokyo Forex and Ueda Harlow.
He said the deal largely was within expectations and that the euro would remain under downward pressure in the medium-term.
The yen’s strength persisted after the European summit and BOJ outcomes, with the dollar falling to an intraday low at ¥75.94. At 0450 GMT, the dollar was at ¥76.01 from ¥76.16 in New York.
"It’s clear that speculators are rushing into the yen while watching the European situation, rather than the (yen’s) moves reflecting economic fundamentals," Japanese Finance Minister Jun Azumi said early Thursday.
