Johannesburg, Dec 6 (I-Net Bridge) - The rand was softer against the dollar in early morning trade on Tuesday as it tracked a sagging euro.
"It's all about S&P putting some European countries on a negative ratings watch and certainly risk aversion has set in," a local currency trader said.
"We'll see what the next headline brings and how the markets react," he added.
The trader put dollar/rand for the initial part of the trading session at 8.00 to 8.10.
At 08:25 local time, the rand was bid at 8.0760 to the dollar from its previous close of 8.0264. It was bid at 10.8035 to the euro from 10.7540 before, and at 12.6198 against sterling from 12.5602 previously.
The euro was bid at US$1.3375 from its previous close of US$1.3384.
RMB analysts said in a note on Tuesday that S&P's decision to put 15 of 17 Eurozone countries - including Germany and France - on a negative ratings watch had interrupted the bullish rand trend.
"Dollar rand opened at 8.05, with a risk of 8.10/12 as the ratings news gets absorbed in the market. Sentiment should, however, recover. Yesterday's agreement between Chancellor Merkel and President Sarkozy is keeping hopes alive of a region-wide deal on Friday - and a positive response from the ECB."
S&P's warning came as quite a surprise, RMB said.
"The market had been worried about the credit ratings for France and some of the other troubled large economies - the PIIGS having been downgraded long ago - but S&P's ratings watch also covered Germany and five other AAA rated economies.
"Their warning is over the risk of a systemic crisis in the Eurozone."
RMB said that historically there was a 50% chance of a country being downgraded after being put on negative ratings watch.
Typically, this happened within 90 days but S&P said it would fast track the decision, which would be hugely influenced by Friday's EU summit results.
The Merkel/Sarkozy deal over fiscal rules covered automatic penalties for those who breached deficit provisions, although it did not give Brussels the power of automatic override, RMB added.
While Tuesday's trade would be focussed on the S&P decision and the Merkel/Sarkozy deal, there would also be the release of revised 3Q11 Eurozone GDP data and German industrial orders data, RMB said.
Standard Bank said in its Tuesday morning note that the S&P announcement had put the fear back into the markets.
"The currency [rand] could be in for a corrective bout of weakness today, but we still foresee rand appreciation into year-end."
Meanwhile, Dow Jones Newswires reported that the euro extended its losses against major currencies in Asia on Tuesday, as an overnight warning from Standard and Poor's on European sovereign debt rekindled concerns over Europe's financial crisis and pushed investors to seek safe-haven currencies like the dollar and the yen.
Broad weakness in Asian share markets also contributed to the risk averse mood.
Late Monday, S&P put the long-term sovereign-debt ratings of 15 euro-zone nations, including Germany, Italy and Spain, on negative watch and flagged a potential two-notch downgrade for France.
"The S&P action raise doubts about the effectiveness of the EUR440 billion firepower of the EFSF if core members' ratings were to be lowered", said Minori Uchida, senior analysts of global markets sales & trading division at Bank of Tokyo Mitsubishi UFJ.
He was referring to the European Financial Stability Facility, which offers financial assistance to countries in the currency bloc.
Uchida said that any credit rating downgrades would exacerbate negative sentiment toward the euro.
"Our near-term focus is on how the European bond market will respond to the S&P announcement later in the day," Junya Tanase, chief currency strategist at JPMorgan in Tokyo.
The yields on euro-zone government bonds fell sharply Monday before the S&P announcement, with the benchmark 10-year Italian bond yield falling to around 5.941%, the lowest since late October.
"I want to see if there will be any change in that trend after the S&P move," Tanase said.
Bids: 08:25 local time Range so far Previous Close
(06:25 GMT)
Dlr/Rand 8.0760 8.0237-8.0921 8.0264
Euro/Rand 10.8035 10.7339-10.8197 10.7540
Sterling/Rand 12.6198 12.5439-12.6382 12.5602
Euro/Dollar 1.3375 1.3361-1.3402 1.3384
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