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FOREX-Euro bounces back from 2-week low after Spain budget

by on September 28, 2012 3:19 am BST
 

Thu Sep 27, 2012 11:19pm EDT

* Spain’s budget soothe market jitters for now

* Moody’s review on Spain’s ratings in focus

* Market still sceptical euro zone can act swiftly

* Commodity currencies fight back, AUD helped by China hopes

By Ian Chua and Hideyuki Sano

SYDNEY/TOKYO, Sept 28 (Reuters) – The euro held firm above a
two-week low on Friday after Spain unveiled a crisis budget that
many saw as a step towards a bailout to stabilise its public
finances.

The single currency looks set to end the quarter with a
small gain, but is likely to stay under pressure in the coming
quarter, with many pitfalls ahead, not just in Spain, now beset
by anti-austerity protests and a secession threat, but also in
Greece, where the whole debt saga started.

“I expect the euro to gradually decline. There’s a risk of
credit downgrade on Spain. The talk between Greece and the
troika may get nowhere. And the euro zone economy will be
fragile,” said Minori Uchida, chief currency analyst at the Bank
of Tokyo-Mitsubishi UFJ.

The euro stood at $1.2934, up slightly from late U.S.
levels after having bounced from a two-week low of $1.2828 on
Thursday, with its 200-day moving average around $1.2825 serving
as a substantial support.

The currency is up 2.1 percent on the quarter, thanks
largely to hopes that Spain’s borrowing costs would be brought
down when the European Central Bank starts buying Spanish debt,
a programme that needs Spain’s request for a bailout to be
activated.

Initial resistance for the euro is seen at $1.2960, the 38.2
percent retracement of its Sept 17-27 slide.

Spain also announced a timetable for economic reforms that
EU Economic and Monetary Affairs Commissioner Olli Rehn says
goes beyond what the European Commission required.

All this is widely seen as paving the way for eventually
seeking a bailout. Madrid is talking to EU authorities about the
terms of a possible aid package.

MORE HURDLES

Analysts warned there are still many hurdles ahead and said
the news merely gave markets an excuse to book profits on recent
bearish trades.

“I think it’s positive that Spain is laying the groundwork
for a bailout. But we still hear disharmony between the euro’s
“northern league” and the south, leaving markets still unsure
how seriously they are trying to support,” said Ayako Sera,
senior market economist at Sumitomo Mitsui Trust Bank.

Prime Minister Mariano Rajoy is resisting market and
diplomatic pressure to apply for a rescue, partly out of concern
for national sovereignty but also because European Union
paymaster Germany insists Spain doesn’t need help.

The Spanish budget also goes to parliament on Saturday and
debates could last weeks. Spain’s 17 autonomous regions still
must present budgets and find an additional 5 billion euros in
adjustments to meet overall public deficit reduction goals.

“The budget represents two steps forward and one step back,
which is why the euro only moved slightly higher,” said Mary
Nicola, a strategist at BNP Paribas.

Markets are now waiting for Moody’s review of Spain’s
sovereign rating, due at the end of the month. On Thursday,
ratings agency Egan-Jones cut Spain’s sovereign rating further
into junk status, citing the country’s faltering banks and
struggling regional governments.

The euro also rose on the yen, pulling up to 100.31
from a two-week low of 99.64 plumbed Thursday.

The greenback, however, softened against the Japanese
currency, slipping to as low as 77.52, its lowest in two
weeks, not least because of Japanese repatriation at the end of
financial half year on Sept 30.

Among the biggest gainers were commodity currencies, which
had been hit hard in the past few sessions. The Australian
dollar climbed as high as $1.0474, more than one full
cent above a two-week trough of $1.0328 set mid-week.

Resistance is seen at $1.0476, the 50 percent retracement of
its Sept 14-26 fall, ahead of $1.0512 and then the Sept 14 peak
of $1.0625.

Partly helping the Aussie is renewed hopes that China,
Australia’s single largest export market, will deliver more
stimulus to stem its economic slowdown.

A Chinese central bank adviser said on Thursday that Beijing
had severely underestimated this year’s global economic slowdown
and further cuts to interest rates or bank reserve requirements
hinge on any new deterioration in the external environment.