Emerging FX-Rand extends gains, central Europe consolidates

By Sujata Rao

LONDON, Nov 7 (Reuters) - The rand soared to new two-month highs versus the dollar on Tuesday, boosted by the greenback's weakness and South African political developments, though central European currencies retreated after recent sharp rallies.

Sentiment in the high-yield sector has been buoyant as U.S. jobs data last week reassured investors that a sharp slowdown is not in the cards for the world's largest economy while interest rates are unlikely to rise further.

The rand touched a two-month high of 7.2675 per dollar <ZAR=D3> adding to recent gains as the euro, the currency of its main trade partner, strengthened. Analysts said markets had also taken as positive a court ruling that dented ex-Deputy President Jacob Zuma's chances of becoming the next leader.

On Monday South Africa's top appeals court confirmed corruption convictions against Schabir Shaik, a former aide to Zuma. The ruling is likely to increase the possibility that Zuma could face new charges after an earlier graft case against him was dismissed.

The emerging market resurgence buoyed the Johannesburg all-share index to a fresh records while rand bond yields <ZAR157=> fell 2.5 basis points to a 4-1/2 month low.

"Zuma's resurgency was one factor weighing on the rand....and this was another story rand bears had jumped on to justify a weak currency, saying the political situation was deteriorating," said HSBC currency strategist Juliet Sampson.

"To the same extent that people used Zuma's resurgence as a rationale to sell rand, the fact that he has been backfooted is rand-supportive," she said.

The currency shrugged off data showing the central bank's net gold and forex reserves rose almost $250 million in September, showing it is keeping a supply of rand to markets.

Sampson forecast the mood to stay firm with future trade data likely to reflect recent export-pickup from South Africa, while the oil price fall could trim import bills.

"This is basically a sound economy with some imbalances.. you have relatively high real interest rates and a conservative and hawkish central bank with a consistent policy," she added.

LIRA PARES GAINS

The other major dollar-cross, the Turkish lira, firmed to the highest levels since August but pared gains as central bank governor Durmus Yilmaz told a conference the bank may resume its foreign exchange purchase auctions, halted since May.

The lira rose to a high of 1.4325 <TRY=> before easing to 1.44 to stand flat on the day.

"Good news as the (central bank) will again start to prop up its FX reserves on a daily basis, but it will keep dollar/lira from falling much below the 1.43 mark in our view," CA-IB/Unicredit said in a note to clients.

Overall, Turkish markets are in a good mood on expectations a European Commission report on Ankara's EU bid will not be as negative as previously thought. Yields on benchmark lira bonds eased to 20.97 percent from Monday's 21,27 percent. Istanbul equities rose over 1.5 percent <.XU100>.

Markets are waiting for September current account data, with analysts polled by Reuters expecting the gap to widen 140 percent year-on-year to $1.3 billion.

Central European currencies fell back roughly 0.25 percent versus euro, consolidating recent gains that took the Czech and Slovak crowns to record highs and Poland's zloty to the highest levels in almost six months <EURSKK=> <EURCZK=> <EURPLN=>.

"We've had massive inflows of foreign capital into central Europe in recent days so it's natural to see some retracement," said Michal Dybula, economist at BNP Paribas in Warsaw.

Dybula said a critical European Commission speech on Monday, warning of the risks attached to loose fiscal policies, had not hurt the currencies, with investors paying more attention to the global backdrop than fundamentals.

"The fundamental picture will tell you a more pronounced correction should be expected but for now, fundamentals are not having a big impact," he said. "As long as people believe in the soft landing scenario for the U.S. economy, it will keep emerging markets well-supported, including CEE-4 currencies." ((Reporting by Sujata Rao London newsroom +44 20 7542 6176 sujata.rao@reuters.com;editing by Ian Jones))

Keywords: MARKETS EMERGING FOREX