FOREX-Euro stays under pressure, eyes on Italy bond sale

by on September 26, 2012 11:10 pm BST

Wed Sep 26, 2012 7:10pm EDT

* Euro at two-week lows vs USD & yen

* Protests in Spain, Greece weigh on sentiment

* Italy bond auction, Spain’s 2013 budget watched

By Ian Chua

SYDNEY, Sept 27 (Reuters) – The euro wallowed at two-week
lows on Thursday, having suffered a third day of decline as
violent protests against austerity measures in the streets of
Madrid and Athens highlighted the challenges facing
highly-indebted euro zone countries.

The single currency stood at $1.2870, after touching
a low of $1.2835. Traders said bids around the 200-day moving
average at $1.2827 helped stem the slide. Stronger support is
seen at $1.2739, the 38.2 percent retracement of the July to
September rally.

Traders also said Spain’s reluctance to request for a
bailout and trigger the European Central Bank’s new bond-buying
programme has dampened sentiment. Investors sold Spanish and
Italian bonds on Wednesday, causing their yields jump.

“Protests in Madrid and Athens coupled with the announcement
that Spain will miss its public deficit target of 6.3 percent of
GDP this year brought euro zone stress back to the fore,”
analysts at BNP Paribas wrote in a client note.

“Spanish 10-year yields rose back up to 6 percent for the
first time since early September. Spain will be the focal point
of the markets today as Prime Minister Rajoy presents his
economic reforms and 2013 budget.”

Analysts said the backup in yields could be a mixed blessing
for Italy, which is looking to sell up to 7 billion euros of
debt later in the day. The higher yield may boost appetite,
although market volatility could just as well keep many
investors away.

Still, investors were wary of getting too bearish on the
euro given that Spain could ask for aid at any time. As well,
nobody wanted to stock up on the U.S. dollar as the Federal
Reserve is running its own stimulus programme.

That confluence of factors saw the common currency down just
2.2 percent from a peak of $1.3173 set on Sept. 17, only a small
correction that could yet turn full-scale if sentiment continued
to sour, traders warned.

At the back of the market’s mind is Moody’s review on
Spain’s ratings expected this week. A possible sovereign rating
cut could take the country below investment grade and add
further pressure on policymakers.

The setback in the euro saw the dollar index pop up
to a two-week high of 80.012. However, it remained within easy
reach of a six-month trough of 78.601 plumbed on Sept. 14, just
after the Fed unveiled its new asset-buying programme.

To the frustration of Japanese authorities, investors once
again sought safety in the yen, driving it to two-week highs
against both the dollar and euro.

The dollar slid to 77.59 yen, before regaining a bit
of ground to last stand at 77.70, while the euro fell as far as

A stronger currency is a drag for the struggling
export-reliant economy and Bank of Japan board member, Takehiro
Sato, told Reuters on Wednesday the bank is ready to add more
stimulus and may ponder new steps if necessary.

Among commodity currencies, the Australian dollar continued
to flounder thanks to the added worry of China’s economic
slowdown. China is Australia’s top export market and the world’s
biggest consumer of commodities such as iron ore.

Given a lack of policy response from Chinese officials, who
are undertaking a once-in-a-decade leadership transition, a
growing number of analysts now expect the Reserve Bank of
Australia to cut interest rates as early as next week.

The Aussie last traded at $1.0371, having sunk as
far as $1.0331. It has lost about 2-1/2 cents since reaching a
six-month high of $1.0625 earlier in the month.

Investors will get another reading on China’s manufacturing
sector from HSBC on Saturday, ahead of a week-long holiday in
the world’s second biggest economy.