FOREX-Euro jumps on ESM comments, outlook still bleak

by on July 25, 2012 8:34 am BST

Wed Jul 25, 2012 4:34am EDT

* Euro spikes higher after Nowotny comments on ESM

* Analysts see more weakness ahead, test of $1.20

* High Spanish yields fan bailout concerns

By Nia Williams

LONDON, July 25 (Reuters) – The euro recovered from a
two-year low against the dollar on Wednesday, jumping sharply
higher on comments from European Central Bank policymaker Ewald
Nowotny that he could see grounds for giving the euro zone
bailout fund a banking licence.

Analysts said such a move would give the European Stability
Mechanism more firepower to fight the debt crisis, but the
market may have put too much emphasis on the comments, given ECB
opposition to date, and investors were likely to sell into the
euro’s spike higher.

The outlook for the euro remained deeply negative given
spiralling Spanish borrowing costs that have fuelled concerns
the country will need a full sovereign bailout.

Some market players said was likely to break below support
at the psychologically important $1.20 level in coming days.
That would open the door to a test of the 2010 low of $1.1876.

“The market is desperate and jumping on anything that even
looks remotely positive. The squeeze higher will fade now and
we’ll probably print a fresh negative later on today,” said
Geoff Kendrick, currency strategist at Nomura.

The euro rose 0.5 percent to hit a session high of
$1.2128. Traders said an Asian central bank and macro funds had
earlier sold into euro strength.

It remained within sight of a two-year low of $1.2040 hit on
Tuesday after some EU officials said Greece is unlikely to be
able to pay what it owes and further debt restructuring is
likely to be necessary.

A slightly worse-than-expected German business climate index
ate into some of the single currency’s gains, adding to concerns
activity in the euro zone’s largest economy is slowing down.

A European Central Bank lending survey found banks made it
harder for firms to borrow in the second quarter and expected to
see a slump in demand as the euro zone debt crisis deepened.

But the euro also regained ground against the yen after the
Nowotny comments, rising 0.5 percent to 94.80 yen,
having carved out a new 12-year low of around 94.12 yen earlier
in the week. Traders in Tokyo cited talk of a euro/yen option
barrier at 94.00 and stop-loss offers under the level.


Spain paid the second highest yield on short-term debt since
the birth of the euro at an auction of three- and six-month
bills on Tuesday, indicating difficulties in future debt sales.

Yields on Spanish debt have jumped since last week when the
region of Valencia said it would need financial help from
Madrid, with investors concerned other indebted regions will
also seek aid.

“Borrowing costs in Spain have already reached unsustainable
levels and the price action in the euro suggests that investors
believe it should only be a matter of time before there is a
need for a sovereign bailout,” said Kathy Lien, managing
director of FX strategy for BK Asset Management.

Delivering yet more bad news for Europe, Moody’s changed the
outlook on its provisional top-notch rating for the European
Financial Stability Facility to negative.

The action was expected given its move earlier in the week
to put a negative outlook on Germany, the Netherlands and

The Australian dollar retreated from a recent record high
against the euro, trading at A$1.1796 from a peak of
A$1.1690 on Monday.

It gained against the U.S. dollar however after Nowotny’s
comment fanned demand for perceived riskier currencies, climbing
0.4 percent to US$1.0257.

The dollar index dipped 0.3 percent to 83.772, off
the previous day’s two-year high of 84.10.