Graphic: renjith krishnan

The rand retreated above the R8.20 per dollar level on Wednesday morning, as there was no let up on pressure on the euro from the Eurozone debt crisis.

At 08:35 local time, the rand was bid at 8.2193 to the dollar from its previous close of 8.1791. It was bid at 11.0527 to the euro from 11.0455 before, and at 12.9545 against sterling from 12.9144 previously.

The euro was at US$1.3448 from US$1.3504 previously.

Standard Bank analysts said in a morning note that the rand extended yesterday's losses as rising risk aversion linked to the Eurozone debt crisis continued to take its toll.

“The optimism seen earlier in the week that the change in governments in Italy and Greece would ensure a return to fiscal health seems to have evaporated, along with appetite for risky assets. Better-than-expected US retail sales data failed to reverse the change in mood. The rand, as ever, remains vulnerable to negative sentiment, which spells further depreciation,” they wrote.

However, they noted, should today's local data surprise to the upside, the rand could enjoy some relief, but with Asian markets in the red this morning and commodity prices softer, the bearish trend looks set to stay.

They said now that the short-term target of R8.20 has been breached, a sustained breach of this level could see the rand head to R8.29, possibly as far as R8.40, if risk aversion rose further.

Locally, retail sales data - at 13:00 - will be watched closely. Growth in SA's retail trade sales at constant (2008) prices for September is expected to lose momentum to a decrease of 6.5% year on year (y/y), from a y/y growth of 7.1% in August, according to a survey of leading economists by I-Net Bridge. Forecasts among the eight economists ranged from 5.7% to 7.1%.

Also of interest today is the release of Q4 consumer confidence from RMB/BER - due at noon.

RMB analysts noted that a further increase in concerns about the future of the Eurozone remain the main driver behind the persistent increase in risk aversion. These concerns are evident in a significant increase in bond yields across most of the Eurozone countries, with 10-year bond yields in Spain and Italy increasing by 23bp and 36bp respectively yesterday.

Italy's bond yields are again above 7%. Just as concerning, if not more so, is the fact that France's 10-year bond yields have continued to increase and posted another record high above German bond yields.

The rise in French bond yields over the last few days has added another layer of complexity to the problems facing the Eurozone (and for that matter, the rest of the world).

“Up to a few weeks ago Germany and France, the two major economies in the Eurozone that still enjoy a AAA sovereign rating, were regarded as the countries that could provide credible support to the European Financial Stability Fund (EFSF). With the markets signalling concerns over the outlook for France's rating, it is questionable whether European leaders will manage to increase the size of the EFSF to a level that will convince markets it has the fire power to stem the crisis,” they wrote.

“All said, the risk of a major fallout in Europe is increasing and risk aversion should remain high. We still expect policymakers to ultimately implement measures that will reduce the risk of a disorderly default by one of the troubled European nations (such as allowing the ECB to implement quantitative easing). Our conviction to this view is, however, not high.

“There is a high risk that political wrangling in the Eurozone could prevent such a solution and that we are, indeed, witnessing the slow demise of the euro as we know it. Such a demise would not be a pretty picture and would be accompanied by a significant spike in global risk aversion which will result in further ZAR weakness,” they said.

Meanwhile Dow Jones Newswires reports that skepticism over the euro zone's sovereign debt tribulations left the bloc's currency lower Wednesday.

“The overarching theme is bond spreads,” said John Doyle, foreign exchange trader at Tempus Consulting in Washington. Noting that Spanish government bond yields are now back above 6% for the first time in three months, he said concern about debt-saddled Greece is making investors nervous that “Italy could be the next shoe to drop.”

To many analysts, the US economy has shown surprising resilience amid strong headwind that earlier this year had raised fears about a new recession. Better-than-expected data have also diminished expectations of more monetary stimulus by the US Federal Reserve, which tends to undermine the US dollar.

Fed officials have yet to completely rule out a third round of bond-buying, or quantitative easing, to jumpstart torpid job and housing markets. On Tuesday, St. Louis Fed President James Bullard said US monetary policy is “appropriately calibrated” for current conditions, and that he wouldn't rule out new stimulus if the economy took a turn for the worse.

More easing is a key reason behind why the euro has held up strongly despite the relentless stream of negative headlines from Europe, analysts said. While the European Central Bank has embarked on an easing cycle of its own, the common currency is still modestly supported by interest rates that are more attractive than those on offer for the greenback.

Noting that the euro is still higher against the dollar than it was earlier this year, Douglas Borthwick, managing director at Faros Trading said that “long euro/dollar is a trade against the grain, yet it is one that has worked year-to-date while showing remarkable resistance in the face of adversity.” - I-Net Bridge