Rand tracking weaker Euro as concerns around the EC economy resurfaced. Europe once again was pressed to the forefront of investor concerns‚ as yields on Spanish 10-year sovereign bonds reached 7.24 percent on Friday‚ after the state of Valencia asked for government aid to help refinance its debt. This is not the kind of situation where fears are just going to fade away‚ since the required amount of aid that Spain will need is likely to mount, given the increasing needs of local governments ,the Spanish government also cut the country’s growth forecasts for 2013 and said that it will remain in recession next year. The euro weakened on Friday afternoon due to renewed concerns surrounding Spain and it is expected‚ EU Finance Ministers approved EUR100bn worth of financial aid for Spanish banks on Friday. However‚ the mood quickly soured when Spanish authorities announced that the country was likely to remain in recession until 2014. Even as foreign appetite for SA bonds remained strong last week ‘I believe the ZAR could struggle to be benefit from these capital inflows because many non-residents could be inclined to hedge their FX risk when buying these bonds.
[box]EU Finance Ministers approved EUR 100bn worth of financial aid for Spanish banks on Friday.[/box]
Sovereign debt a big issue in Spain as Greece maybe insolvent
Struggling Spain pushed European stocks and the euro sharply lower Friday as investors were spooked by the country’s deteriorating outlook, largely discounting a Spanish bank rescue accord. The bank bailout was largely as expected but the markets were hit after Madrid warned that it did not expect the economy to return to growth until 2014 and regional finances came under increased strain. The forecasts hit sentiment badly and the damage was compounded by news that the Valencia region was asking the central government for financial aid, heaping the pressure on Madrid which has imposed sweeping austerity measures in a hugely unpopular drive to stabilise the public finances. Mass protests against the government’s draconian austerity measures overnight added to the negative tone towards Spain and Italy. The Sovereign debt issue is gaining more and more momentum, as and when the months go by the demise of the Euro must be a huge scare for the ECU. Euro against dollar gapped lower at the opening, trading so far as low as 1.2106 weighed by renewed fears that Spain may soon ask for a full bailout and Greece could slip into bankruptcy.
My Gut feel
My gut feel is the ZAR will stay at these high levels while the Euro crisis is on and there is talk of another rate cut in the future. Trading range is 8.2100/8.5100. Exporters should take advantage of the high level of the ZAR and do % selling of their proceeds. Importers are now being caught between a rock and a hard place as to what they should be doing. I think they should look for the short term rand strength and buy into it and maybe their costing to be done at the 8.700 level, as that can be easily obtained in this volatile and uncertain market.