The rand was around 2% softer - and at more than a one-year low - against the dollar in noon trade on Monday as it tracked a vulnerable euro and as risk appetite waned.
“The rand is at the mercy of what is happening globally and the euro has sold off quite a lot,” a local currency trader said.
“It's a case of a stronger dollar and a risk-off situation but the market will be moved by any new developments in the eurozone.”
The trader added that the rand was in line to weaken further.
At 11:48 local time, the rand was bid at 7.5903 to the dollar from its previous close of 7.4568. It was bid at 10.3569 to the euro from 10.2151 before, and at 11.9278 against sterling from 11.7955 previously.
The euro was at US$1.3653 from US$1.3702 before.
RMB analysts said in a note on Monday that the inability of European politicians to get on top of the PIIGS [Portugal, Italy, Ireland, Greece, Spain] crisis was creating increased risks of another financial crisis - this time centred on eurozone banks.
“Leveraged assets - such as the rand - are in for a rough ride.
“We should expect continued wild swings, with 15-20 cent ranges. We're getting closer to the point at which the rand finally capitulates. Don't rule out 8.00 by the middle of the week.”
RMB said that over the weekend more evidence that the Greek's could not stomach further austerity had been seen, while German voters seemed fed up with the bailouts.
“We now face the prospect of a disorderly Greek default; another act of desperation from the troika (ECB, IMF, and eurozone) today might stave this off for a few weeks but the underlying problems aren't resolved.”
The threat to the rand came through the eurozone financial system. Emergency US dollar lending from the ECB had reduced liquidity pressures but, with banks doubting each other's solvency, there was a risk of the money markets freezing up and so an unwinding of leveraged plays.
“Let's see how policymakers respond. This week we have the IMF, World Bank and G20 meetings where they can say all the right things. Most importantly, the Fed will meet. Consensus is that it's too early to expect QE3 but that they better do something to calm markets; operation twist, where they sell the short end of the curve to buy the long end, seems the most likely.”
RMB added that a eurozone banking sector crisis was the worst case scenario for the rand.
“This still shouldn't be seen as the core view but the risks have increased significantly. The trade-off for importers is that hedging now may lock in unattractive levels, but failing to act risks much worse. Option-based strategies may offer better alternatives. While volatilities increased significantly, they still understate the risks.”
Meanwhile Dow Jones Newswires reported that the dollar rose against the euro and other risk-sensitive currencies on Monday, as the failure of European officials to show progress on containing the eurozone debt crisis sapped risk appetite.
“It continues to sound like there is little coordination among the EU leaders to resolve the crisis,” said BNZ currency strategist Mike Burrowes in Wellington.
Ministers warned they might withhold the next tranche of Greek aid, EUR8 billion due in October, if Athens failed to take decisive action. Greek Prime Minister George Papandreou cancelled a US trip to run crisis meetings, continuing on Monday, but Finance Minister Evangelos Venizelos said Athens was being “threatened and humiliated” by the demands of the EU, IMF and ECB.
A weekend setback for German Chancellor Angela Merkel, as her government's coalition partner, the Free Democrats, were crushed in Berlin elections, also fed into euro weakness and added to the general caution in currency markets.
Dealers would closely watch a Tuesday-Wednesday meeting of the US Federal Reserve for any signs of further easing, which could eat into recent dollar gains and support risk. - I-Net Bridge