Wednesday, 30 November 2011

Euro takes breather after rally, Aussie dips

 SINGAPORE: The euro stabilised on Thursday after rallying the previous day as major central banks acted together to ease a credit squeeze stemming from the euro zone's debt crisis, while the Australian dollar gave back some of its hefty gains.

The euro held steady at $1.3452, having jumped to a one-week high of $1.3533 on Wednesday after central banks of the United States, euro zone, Canada, Britain, Japan and Switzerland lowered the cost of dollar loans to the banking system.

Market players, however, are sceptical that this will be enough to spur a sustained rally in the euro and risky assets, since the joint action is aimed at easing symptoms of the euro zone's debt crisis rather than treating the cause.

"It may be effective in alleviating some of the excessive tensions in the money market. But the market still hasn't been shown any convincing steps aimed at solving the (euro zone's) debt problems," said Masahide Sato, vice president at Mizuho Corporate Bank's forex division in Tokyo.

"There could be a little more short-covering in the euro ahead of the year-end, but that may be all," he said.
The euro could rise toward $1.3600 or so by the end of December, Sato said, adding that one possible upside target might be the 55-day moving average that now comes in around $1.3622.

Currency speculators increased their net short position in the euro to 85,068 contracts in the week ended Nov. 22, up from 76,147 the week before, data from the US Commodity Futures Trading Commission shows, suggesting the euro could gain support if such positions are unwound.

"A psychological boost more than anything else in the long run. It doesn't address any kind of real fundamental problem," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong, referring to the enhanced liquidity backstop announced by the major central banks.

"I don't think this is going to be something that's going to kick off a two month rally in risk assets unless you see it combined with something of a more structural nature coming out of the euro zone," he added.


After dipping to a seven-week low last Friday, the euro has gotten some reprieve this week on short-covering, helped by signs that Germany and France are pushing for more rapid, deeper fiscal integration among euro zone countries, and hopes for IMF assistance for Italy.

A push in the direction of fiscal union among euro zone countries and a stronger commitment to fiscal discipline could open the way for the European Central Bank to step up its bond-buying programme and calm turmoil in euro zone debt markets, market players say.

EU finance ministers expect the ECB to step in forcefully to calm bond markets if EU leaders agree to move towards fiscal union at a summit on Dec, 9, the Polish EU presidency said on Wednesday.

Commodity currencies, which were given a lift on Wednesday after China cut its reserve requirements for commercial lenders for the first time in three years, gave back some of the previous day's gains.

The Australian dollar fell 0.7 percent to $1.0209 after having jumped 2.8 percent on Wednesday. Tough resistance is seen around $1.0335/40, the 61.8 percent retracement of its fall from late October to late November.

The boost in market confidence from the central banks came at an opportune time for Spain to issue up to 3.75 billion euros of bonds later on Thursday.

Analysts say the auction could well go like Italy's sale of three and 10-year bonds on Tuesday, which drew reasonable demand but saw yields leap to levels deemed unsustainable for public finances.
The dollar edged up 0.1 percent against the yen to 77.70 yen.

The dollar may pierce through a layer of dollar offers from Japanese exporters lurking above 78.50 yen and rise towards 79.00 yen over the coming days if the current move into riskier assets is sustained, said a senior spot trader for a major Japanese bank in Tokyo.

Copyright Reuters, 2011