Rand takes lead from firmer euro

Johannesburg - The rand was firmer in early trade on Monday, in line with the stronger euro, which rallied in reaction to the EU bank stress tests results released late Friday.

At 08:45 local time the rand was bid at R7.3661 to the dollar from R7.4111 at Friday's close. It was bid at R9.5577 to the euro from R9.5646 before and at R11.4243 against the sterling from R11.4402 at its previous close.

The euro was bid at $1.2951 from $1.2886 overnight.

RMB analysts said in a morning report that the initial reaction to the EU bank stress tests released late Friday was relief - US markets pushed up quite strongly and EUR/USD rallied, as only seven of the 91 banks failed.

"But subsequent criticism has been rife with many saying the tests lacked credibility given that the worst case assumptions weren't severe enough. One wonders if this really matters. Stressed banks should now have access to EU emergency funds and with detailed exposure to PIGS debt specified for all (except some German banks) the market can now do their own stress tests," they
said.

They added that for now, the environment is rand friendly.

"Note in particular the fall in the investor fear gauge index - VIX, an index of expected volatility in US equities - to levels last seen in early May and the new push on EUR/USD towards $1.3000. As things stand, downside pressure is growing on the R7.39/44 support band," they said.

Dow Jones Newswires reported the euro and sterling are higher Monday on lessened risk worries after the European bank stress tests. From here, euro and sterling are likely to consolidate in ranges.

The handful of banks that failed were smaller banks of low consequence, said Ron Leven, currency strategist at Morgan Stanley in New York. Still, it was "enough to show this was a serious exercise."

Five Spanish banks, one German bank and one Greek bank were the only institutions to fail the tests. Their combined shortfall would be about €3.5bn, a number that struck many analysts as too low.

"The stress test results were neither the buzz kill nor euphoric event that was needed to break the EUR/USD out of its current range," said Kathy Lien, director of currency research at Global Forex Trading in New York.

"It will be back to fundamentals for the currency market on Monday-we are walking into a week with a large number of potentially dollar-negative event risks, and because of that, the EUR/USD could extend its gains," she said. 

  - I-Net Bridge