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FOREX-Euro bounces off 4-month low, but remains under pressure

Published: May 21, 2012 | 7:19 am
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* Euro off 4-month low, helped by short-covering
* IMM net euro short positions hit record high
* Markets cautious despite G8 pledge to combat market turmoil

TOKYO – The euro extended its rebound from last week’s four-month low on Monday but investors remained concerned over financial turmoil in Greece and Spain, drawing little comfort from a broad G8 pledge to take steps to fight the euro zone’s debt crisis.

The common currency rose on short-covering after speculators piled up a record amount of bets against it, according to data from a U.S. financial watchdog released late last week.

“We are entering a consolidation phase with regard to the euro. It will not be known for a while whether Greece will stay in the euro or not with a Greek election a few weeks away,” said Minori Uchida, chief analyst at the Bank of Tokyo-Mitsubishi UFJ.

“The market may show some minor reaction to Greek opinion polls… but it is hard to sell the euro in light of already large short positions in the currency,” he added.

A flurry of polls on Saturday showed the race to lead Greece has tightened into a dead heat between the left-wing SYRIZA party, which is calling for renegotiation of international bailout terms, and the conservatives who came first in an election earlier this month.

The U.S. Commodity Futures Trading Commission said on Friday speculators’ short euro positions climbed to 173,869 contracts, the highest on record, while their bets in favour of the dollar against other currencies also rose to the highest level since at least mid-2008.

The single currency last stood at $1.2786, slightly above its New York close on Friday, and about 1.2 percent above a four-month trough of $1.2642 hit earlier on Friday.

“This is driven just by short-covering and has little to do with economic fundamentals of the euro,” said Kimihiko Tomita, head of forex at State Street.


For now, the euro has managed to stay above its 2012 low at $1.2624, a major chart point, a break of which would take the single currency back to depths not seen since August 2010.

For now, the euro has managed to stay above important technical support zone between $1.2550 and $1.2624, with the former being channel bottom of its rise from 1998 to 2008 and the latter being its 2012 low.

Worries about a messy Greek exit from the euro zone and problems in Spain’s banking sector had seen investors dumping the euro in the past few weeks.

“A Greek exit would produce significant contagion to other peripheral countries, where both sovereigns and banks would come under pressure. Limiting the damage of contagion would depend crucially on the speed and magnitude of the policy response,” JPMorgan analysts wrote in a report.

The euro drew little help from Saturday’s comments from a summit of the G8 leading industrialised nations, which market players viewed as short on details and long on rhetoric.

At the meeting, world leaders backed keeping Greece in the euro zone and revitalising a global economy increasingly threatened by Europe’s debt crisis.

“There’s a lot of talk and no substance. Until you get some certainty about Greece and the fear of contagion eases, the volatility is here to stay,” said Savanth Sebastian, an economist at CommSec in Sydney.

“Keep in mind there’s no great news coming out of China as well. There’s a lot of talk about China slowing, so that’s further uncertainty.”

Chinese Premier Wen Jiabao called on Sunday for additional efforts to support growth, providing some support for reeling Chinese shares, but concerns about the slowdown in emerging economies remained far from removed.

Not surprisingly, the safe-haven U.S. dollar and yen were among the best performers last week. The greenback on Friday hit a four-month high against a basket of major currencies. It was trading slightly off that peak on Monday.

It was underperforming the yen, however, and last stood at 79.15, not far off a three-month low around 79.00 set on Friday.

The CFTC data also showed a lightening of bearish yen bets, although substantial short positions remained. This has left intact the risk of further downside for dollar/yen if traders are forced to unwind such positions, analysts said.

“We think that a move below 79.00 could trigger such a squeeze and cause an accelerated move toward 78, where a threat of intervention would likely provide the cross with support,” BNP Paribas analysts wrote in a note.

Against a jittery backdrop, commodity currencies such as the Australian dollar continued to struggle. The Aussie was last at $0.9852, still not far from a near six-month trough of $0.9795 plumbed on Friday.


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