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FOREX-Euro rebounds from 2-week low, lifted by Spain budget news

by on September 27, 2012 8:27 pm GMT
 

Thu Sep 27, 2012 4:27pm EDT

* Spain releases budget for 2013, viewed as euro-positive
    * Euro support seen at 200-day moving average near $1.2826
    * Focus on Spanish bank stress test on Friday
    * Egan-Jones downgrades Spanish rating


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 27 (Reuters) - The euro rallied from two-week
lows against the dollar and yen on Thursday after Spain unveiled
a 2013 budget viewed as a step in the right direction, easing
worries the region's debt crisis was worsening. 
    Spain, the euro zone's fourth largest economy, announced on
Thursday a detailed timetable for economic reforms and a tough
2013 budget that focused primarily on spending cuts instead of
tax increases. 
    Analysts said Spain's move away from tax increases should
temporarily help quell street protests in the nation's capital.
    "Overall, Spain's 2013 budget appeared to come across as
fairly balanced,' said Joe Manimbo, senior market analyst at
Western Union Business Solutions in Washington. "By focusing on
spending cuts rather than on tax increases, it didn't appear
overly austere." 
     In late afternoon trading, the euro rose 0.3 percent to
$1.2915, sharply above a trough of $1.2827 hit earlier in
the session, which was its lowest since Sept. 12.
    The euro has support at the 200-day moving average near
$1.2826 and around $1.2740, the 38.2 percent retracement of the
July to September rally.
     Against the yen, the euro also edged higher, rising 0.1
percent to 100.19 yen, after hitting 99.62 yen earlier
in the day, its lowest since Sept. 13.
    Still, some market participants remained skeptical about
Spain's budget despite the positive market reaction.
    David Schnautz, rate strategist at Commerzbank in New York
thinks Spain's budget was not a "breakthrough announcement",
while GFT currency strategist Neal Gilbert believes the
country's strategy of keeping the masses happy by not raising
taxes won't work in the long term.
    "(Spain's budget) will probably eventually lead to them
needing a bailout," said Gilbert in New Jersey. "In fact, the
current situation in Spain is very similar to another highly
scrutinized budget plan a few years ago in Greece, and we all
know how that turned out."
    Investors also are anticipating on Friday the release of a
stress test of Spain's banking sector, which according to
Reuters, is likely to reveal capital needs of about 50-60
billion euros ($77.5 billion). The latest figure, will be used
to determine how much of the 100 billion-euro credit line
available to Spain is needed to recapitalze the country's banks.

    BAILOUT DILEMMA 
    Uncertainty over the timing of an aid request from Spain and
divisions within the European Union over a plan to create a
banking union sent the yield on Spain's 10-year bond
 on Thursday to its highest since the ECB announced
its bond-buying plan on Sept. 6.
    Adding to concerns over Spain, the indebted Castilla La
Mancha region may seek 800 million euros ($1 billion) in
emergency funding from the central government, regional and
party sources said on Thursday. 
    Most strategists said the euro was likely to appreciate if
and when Spain requests a bailout to trigger ECB bond-buying,
although gains would be curbed by renewed concerns about Greece.
    Demonstrators clashed with police in Athens and Madrid this
week in protest over new austerity measures. 
    Greece's international lenders are at loggerheads over how
to respond to its debt crisis, threatening more trouble for the
euro in the coming weeks. 
    A Moody's review of Spain's ratings is also expected this
week. A cut could take the country below investment grade and
put further pressure on policymakers. 
    Late on Thursday, ratings agency Egan-Jones downgraded
Spain's sovereign rating further into junk status, to a double C
from double C plus, citing the country's weak banking sector and
struggling regional governments.  
      
    MYRIAD OF MIXED U.S. DATA
    An array of U.S. data, meanwhile, painted a mixed economic
picture. 
    Orders for long-lasting U.S. manufactured goods dropped
sharply in August suggesting the main engine of economic growth
was stalling, offsetting hopeful signs of an improvement in the
labor market. A separate report showed the number of Americans
filing new claims for jobless benefits fell 26,000 last week to
a two-month low. 
    U.S. economic growth, on the other hand, was much weaker
than previously estimated in the second quarter as a drought cut
into inventories. 
    The dollar last traded down 0.2 percent against the yen at
77.60 yen and remains within sight of a seven-month low
of 77.13 hit on Sept. 13, the day the Federal Reserve announced
a new round of monetary stimulus.