After a month long high against the dollar, the euro fell off its pedestal. After four days of gains, an election that turned out for a win in pro-bailout parties in Greece- the worries about the borrowing costs for Spain’s bailout were still painfully looming. This is a result of the borrowing costs reaching levels that are considered to be unsustainable.
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- Greek bounce short-lived; Spain, Italy fears dominate
- Spanish 10-year bond yields rise above 7 pct
- Euro seen a sell into any bounce
By Gertrude Chavez-Dreyfuss
NEW YORK, June 18 (Reuters) – The euro fell from a one-month high against the dollar on Monday after four days of gains, as an election win for pro-bailout parties in Greece failed to ease worries about Spain’s borrowing costs, which surged to levels seen as unsustainable.
While the election result allayed immediate fears of Greece being forced out of the euro zone, uncertainty persisted as the winning centre-right New Democracy party must now try to cobble together a government with other parties backing the international bailout.
Antonio Samaras, the New Democracy leader, on Monday, said the country needed as broad a coalition government as possible, after radical leftist refused to join.
Market players were also concerned about the euro zone’s ability to respond to the risk of contagion engulfing larger economies like Spain and Italy. All of which is likely to see investors sell into any near-term bounce by the euro.
“The win in Greece does not really resolve anything. It’s still going to be tough for Greece,” said Boris Schlossberg, managing director ar investment advisory firm BK Asset Management in New York.
“And with Spanish and Italian yields at high levels, the credit market remained skeptical that Europe is going to get out of the debt crisis.”
The euro was down 0.1 percent on the day at $1.2619, off a one-month high of $1.2747 struck in the Asian session, as it came under pressure on reported selling by Asian sovereign investors.
It fell past reported stop-loss orders around $1.2660-70 to $1.2620 in the European session with support expected around the June 13 high of $1.2610.
Ten-year Spanish government bond yields, hit by persistent concern about the country’s fiscal and banking problems, rose above the 7 percent line seen as unsustainable in the long-term and at a level that forced other peripheral euro zone nations to seek bailouts.
Despite the problems facing the bloc, some strategists saw potential for the euro to rise given a build-up of huge bearish positions in the common currency, taken on concerns that a win for anti-bailout parties could lead to Greece rejecting austerity measures and leaving the euro.
“In the short term, a short squeeze or speculation about quantitative easing by the Federal Reserve could give the euro a lift, but in the medium term it is a sell because Europe’s problems are deep-rooted and will not go away,” said Howard Jones, adviser at RMG Wealth Management.
“Any rebound to around $1.2800 is a selling opportunity.”
Positioning data showed speculators’ massive net short positions of 195,187 contracts last week, even after having trimmed them from the previous week’s record high of 214,418 contracts.
Fund of funds Quaesta Capital in Zurich Switzerland, which manages $3 billion in assets, saw euro shorts among its fund managers continuing to be one of the biggest positions last week, along with bets against the Swiss franc.
Interestingly, the U.S. dollar showed the largest outflow last week in the portfolios of the fund managers Quaesta tracks, while the Canadian currency showed the biggest inflow last week.
FED QE RISK MAY HELP EURO
In the options market, near-term implied volatilities fell, with the one-week easing to 11.45 percent from a high of around 16.75 percent last Thursday, while the one-month fell to a roughly four-week low of 11.26 percent.
However, one-month risk reversals pointed to a bias for euro weakness.
European finance ministers meet on Friday and a summit is scheduled for the end of this month, but little is expected in the way of fresh policy measures towards a banking union or greater fiscal integration like common eurobonds.
Traders expect some volatility in the currency market in coming days. The common currency could benefit versus the dollar on speculation that the U.S. Federal Reserve may opt for more easing to boost growth.
Many market players expect the Fed to extend its long-term bond-buying through Operation Twist by a few months from the current deadline of June, after a series of disappointing data. Additional easing by the Fed could also support other perceived riskier currencies against the greenback.
The dollar index was up 0.3 prcent at 81.845 after hitting a one-month low of 81.266. The Australian dollar was down 0.1 percent at US$1.0067, off a one-month high of US$1.0135.
The safe-haven yen fell against the euro, which rose 0.3 percent to 99.76 yen, while the dollar advanced 0.5 percent at 79.12 as a result of the initial risk-positive reaction to the Greek vote.
For the past few weeks, and even months, traders have been carefully eyeing the elections in Greece- they knew an anti-bailout politician could get elected. A pro-bailout party got into office, but that seems like it was maybe too little too late as the euro continues to lose value.
The euro zone’s ability to respond to the risk of contagion engulfing larger economies- such as Spain and Italy has market players very concerned at this point. We are likely now to see investors sell into any near term bounce of the euro.
Greece’s win of a pro-bailout party did not end up solving anything. Many experts were predicting late last week that a favorable outcome would help the euro- a theory proving to now be wrong. Even with the win, it looks like it’s still going to be very tough for the Greeks.
Keeping with last week’s trend, the Spanish and Italian yields still remain to be very high- this caused the credit market to remain skeptical that Europe will be able to get out of this looming debt crisis.
Just one day after the election, the euro is down, not up like expected, by 0.1 percent.
The much watched ten year Spanish bonds rose well above the ‘point of no return’ line of 7 percent- the 7 percent mark is a line that is seen to be unsustainable in the long run, and is a level that forced other euro zone nations to seek bailout packages.
Some experts are still predicting a rebound in the future, and see the current situation as a short term reaction to the uncertainty in the markets.
American funds were in a favorable upswing with the U.S. dollar showing the largest outflow last week in the portfolios of the fund managers Quasta tracks, and the Canadian currency showed the biggest inflow last week,
Interestingly, the U.S. dollar showed the largest outflow last week in the portfolios of the fund managers Quaesta tracks, while the Canadian currency showed the biggest inflow last week.
Do you think the euro will continue to slide this week? Or do you think the slide was a knee jerk reaction to changes around the country, and it will bounce back?
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