Following the French and Greek general elections 12 days ago, which saw a distinct swing in sentiment against the austerity measures being followed by the European Union, we warned that markets would interpret this event negatively and drive commodity prices and the Rand downwards as risk aversion towards risky assets would rise. The Rand's depreciation has since occurred even more dramatically than one might have believed, with the currency losing almost 10% of its value. The question on everyone's mind therefore is when this depreciation might stop.
In this regard, one sees a strong likelihood of a replay of a scenario witnessed on several occasions in the last few years. In the wake of panic surrounding the Euro debt crisis and the resultant sharp fall in the financial markets, governments or central banks of developed economies have inevitably stepped in to provide some stimulus and relief to defuse the crisis, temporarily at least. With the G8 summit over this coming weekend, one should not be unduly surprised to hear of an announcement that might provide renewed liquidity to financial markets next week, resulting in a rally in equities, commodities and the Euro and Rand.
It may not be totally surprising that both the Euro and Rand have fallen back to approach the lows they attained over the past year, at $1.26 and R8.60 respectively. These levels are therefore likely to provide support for these currencies and some form of stimulatory announcement could be the catalyst to bring about a rally.
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