Categorized | Forex

FOREX-Euro steady, but vulnerable to Italian and Greek woes

FOREX-Euro steady, but vulnerable to Italian and Greek woes

* Euro runs into selling by investors at uptick

* Euro zone bond yields to offer direction to currencies

* USD/JPY ensconced between offers and bids from real money players

By Anirban Nag

LONDON, June 13 (Reuters) – The euro was steady on Wednesday, w ith bearish investors selling at higher levels as concerns mounted that debt contagion would ensnare Italy and as general unease prevailed about the euro zone before crucial Greek elections.

Even yields on normally safe-haven German bunds climbed in a clear signal that investors are increasingly gloomy about the euro zone. Some cited this as evidence that the rising cost of shoring up the euro zone was taking a toll on Germany’s creditworthiness.

Germany is Europe’s largest economy and paymaster and major currencies are likely to take cue from euro zone bond yields, traders said. If Italian and Spanish bond yields continued to edge up towards unsustainable levels of around 7 percent, the euro could come under more pressure in the near term.

On the other hand, if bond yields eased, it could provide some temporary relief to the euro.

The euro was flat on the day at $1.2522, well above its near 2-year low hit on June 1 at $1.2288 but below its three-week high reached on Monday at $1.2672.

It rose past reported offers from sovereign investors around $1.2520 with stop-losses triggered on its move to a session high of $1.25389. Near term resistance is eyed at the 21-day moving average around $1.2551.

“There is a risk that the Spanish problems could spread to Italy and investors are mindful of that,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

“The risks are asymmetrical against the euro and while only a bout of short covering can lift the euro, we would suggest investors fade into that rally.”

Investors and speculators have added to significantly high bearish bets against the common currency in the past few months as the euro zone crisis swept across much of Europe. The euro has fallen more than 7 percent from the peak of 2012 hit in February and few see the situation improving any time soon wit h no credible policy response in sight.

Analysts say unless euro zone policymakers take steps towards a more cohesive fiscal union and puts its banking system in order, bearish sentiment towards the euro will stay entrenched.

IMPLIED VOLATILITY JUMPS

Concerns over the outcome of Greek elections at the weekend, where parties opposing and supporting harsh austerity measures imposed by the country’s international lenders are neck and neck in public opinion polls, led some investors to remain on the sidelines.

The options market was positioning for the elections with 1-week euro/dollar implied volatility trading at the highest level since November at 15.9 percent as quoted by ICAP , up from 10.5 percent last Friday.

“One week implied volatility is hitting extreme levels. Many players are buying downside puts to protect themselves in case anti-bailout parties win the vote,” said a trader for a Japanese bank. He added if that happened, the euro could quickly tumble below $1.2288, the 23-month low struck on June 1.

Against the safe-haven yen the euro was up 0.2 percent at 99.70 yen. Traders said Japanese exporters were likely to cap any gains in the currency around 100 yen.

They also cited uncertainty about the terms of the 100 billion euro Spanish rescue amid fears that private bondholders could be pushed down the repayment chain below official lenders, risking losses in any debt write-down, similar to Greece.

Meanwhile, Italy faces a test on Thursday, when it plans to offer up to 4.5 billion euros of fixed-rate bonds. The sale comes as 10-year Italian bond yields have surged past 6 percent, undermining confidence in the ability euro zone’s third-largest economy to undertake austerity reforms.

The dollar was flat against the yen at 79.54 yen, hovering below this week’s high at 79.92 yen. Traders reported offers around 79.70 yen from Japanese exporters and bids emerging around 79.20. Chart analysts were eyeing the 100-day moving average at 80.23 as the next resistance level.

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