The rand was softer against the dollar in early morning trade on Tuesday, as it tracked a badly shaken euro and risk aversion persisted.
“There's huge nervousness about contagion and people are getting their knickers in a twist,” a local currency trader said.
“The euro didn't have a very good night at all and this is reflected in the rand today,” he added.
He saw the dollar/rand trading in a range of 6.84 to 6.92.
“But this could change with the euro as it has a good chance of slipping further.”
At 08:52 local time, the rand was bid at 6.8844 to the dollar from its previous close of 6.8347. It was bid at 9.5965 to the euro from 9.5945 before, and at 10.8941 against sterling from 10.8512 previously.
The euro was at US$1.3934 from US$1.4038.
RMB analysts noted in a morning report that it was “almost time to panic”.
They added that the euro-zone crisis had entered a new and much more dangerous stage as concerns had spilled from the periphery into the core - gripping Italy and Spain, the zone's third and fourth largest members.
“We can say, without exaggeration, that this creates risks of another crisis at least as bad as the Lehman's bankruptcy. And coming a working day after the US employment markets were reported at recessionary levels, all risky assets are suffering. The dollar/rand spiked to 6.85 yesterday and risks further upside today.”
On the question of whether Italy could go bankrupt, RMB said: “The country's budget is actually on a sustainable path; the problems though are that the economy is structurally moribund and government debt levels are astronomical.
“What's more, political infighting is raising questions over the government's commitment to fiscal austerity, this at a time when Greece's problems have been squarely in the news. And remember that the size of the economy and the size of the country's debts, is such that they cannot easily be bailed out.”
RMB said that what investors needed to fear was fear itself.
“Italian yields are rising rapidly as the markets lose faith; the 10-year yields spiked 20 basis points yesterday and are now up 90 basis points since the start of the month and at a record spread over German bunds. And as yields rise, the budget starts to become unsustainable, making markets fears self-fulfilling. As such, unless calm soon returns - which it probably will - we risk chasing our tails into oblivion.”
Many might yawn and say that they've seen this before, RMB noted.
“The rand weakens but soon we're recovering once again. A repeat of that pattern is indeed the most likely outcome. But it is no means assured.”
Meanwhile, Dow Jones Newswires reported that the euro fell sharply in Asia after newly elected International Monetary Fund (IMF) managing director Christine Lagarde appeared cautious about a second bailout package for Greece, making comments that swept away earlier gains following euro-zone finance ministers' efforts to calm the markets and prevent the European debt crisis from spreading to Spain and possibly Italy.
“We're not yet at the stage of discussing the conditions and terms and lengths and volume,” Lagarde said in a roundtable with media in Washington. The statement appeared at odds with the fact that John Lipsky, the IMF's first deputy managing director, is meeting this week with European officials in Brussels, seeking to draft a new package for Greece.
The euro tumbled on the news, breaking through key stop losses to hit a four-month low of $1.3932 on EBS, compared with a high of $1.4063 after the euro-zone finance minister meeting.
Lagarde also said that Italy must do more to achieve strong growth and reduce its budget deficit.
“Clearly Italy is facing issues at the moment, which are essentially market-driven,” she said.
The possible spread of the euro crisis to Italy was also the subject of talks by the euro-zone finance ministers.
“Everything will be done to guarantee the financial stability of the euro zone and within the euro zone,” Jean-Claude Juncker, chairman of the group of finance ministers of euro-zone countries, said after the meeting in Brussels.
“What scares us is the problem spinning off into Italy,” said Nobuaki Kubo of Brown Brothers Harriman.
“That would be a totally different problem from that of Greece”, given the size of its economy.
The ministers said they would consider measures to enhance the “flexibility” and “scope” of the European Financial Stability Facility, the EUR440 billion fund set up last year to lend money to euro-zone nations.
The ministers also said they were still planning to get Greece's private creditors to contribute to a new aid package for the country. The statement also noted that the European Central Bank maintained its opposition to allow Greece to default, which ratings agencies have said would be a likely result of plans to get Greece's private-sector creditors to contribute.
The market was largely unimpressed, however.
“The fact that the euro-zone finance ministers' meeting failed to come up with measures that can allay market concerns about the debt problem is clouding the outlook for the euro,” said Yoshio Yoshida, a trader at Mizuho Trust and Banking.
“Risk aversion is likely to persist for the rest of the week,” he added.
Market participants would focus on any development on European sovereign debt issues at the Economic and Financial Affairs Council later in the day. - I-Net Bridge