The rand surrendered gains against prominent currencies in early trade on Friday as the initial risk rally sparked by news out of the euro-zone summit faded.
At 8.01am local time, the unit slumped to R7,7353 against the dollar, compared with R7,7051 at the JSE’s close on Thursday. But it slid to R10,9687 against the euro, compared with R10,9248 previously, and against the sterling at R12,4390, compared with R12,3917 previously.
John Cairns and Nema Ramkhelawan-Bhana, currency analysts at Rand Merchant Bank , said the response to the euro-zone summit has been much better than they expected, with all global risky assets rallying strongly, led by euro-zone bank stocks.
European shares soared to their highest close in 12 weeks, with French banks, heavily exposed to euro-zone peripheral debt, among the biggest gainers. Credit Agricole gained 22% and BNP Paribas pocketed 17%.
"The initial burst has faded, though, leaving uncertainty whether there will be further follow-through today. This puts the dollar/rand in the low R7,70s this morning, having broken through the key R7,78 support level yesterday, against our expectations and despite strong importer demand," said Mr Cairns and Ms Ramkhelawan-Bhana.
A team of currency researchers from Standard Bank said optimism over the euro-zone debt agreement gave the rand a boost, despite worse-than-expected producer price index (PPI) data.
"The rand did weaken briefly but then rebounded strongly. With no local data out today, the rand is likely to continue tracking developments in the European Union and US. The stage appears set for further rand appreciation today because sentiment remains strongly positive," said the researchers.
Mr Cairns and Ms Ramkhelawan-Bhana warned the global markets rally would probably run out of steam soon, due to a lack of crucial details of the euro-zone debt package and doubts about whether the package and greater Greek default would be enough. This may only happen next week, though.
"Today’s trade will still be directed by sentiment over the euro-zone summit, with the only real data of relevance being US personal income and spending data this afternoon. Next week sees a much busier data and events calendar, and attention will turn to whether the US economy remains buoyant after a very good (third quarter)," said Mr Cairns and Ms Ramkhelawan-Bhana.
