FOREX-Euro gains in volatile trade as risk aversion abates

Tue Jun 12, 2012 10:02am EDT

Related Topics

* Euro swings in choppy trade, offers cited above $1.2530
    * Austrian minister says Italy may also need a bailout
    * Near-term implied volatility jumps ahead of Greek election

    By Julie Haviv	
    NEW YORK, June 12 (Reuters) - The euro rose against the
dollar and yen in choppy trade on Tuesday as risk aversion
abated somewhat, but concerns over Spain's bank bailout deal and
a looming Greek election are seen capping the single currency's
upside.	
    Reports of official preparations for a Greek exit from the
euro zone, uncertainty about the logistics of Spain's bank
bailout and a rise in Spanish and Italian bond yields had
investors selling the euro at higher levels.	
    The euro retreated from a near three-week high on Monday as
the initial euphoria from Spain's 100 billion euro bank rescue
fizzled, with investors concerned bailout-related payments could
rank ahead of regular government debt in the queue for
repayment. 	
    "Spain's bank bailout is fraught with unanswered questions
and markets do not like uncertainty," said Camilla Sutton, chief
currency strategist at Scotia Capital in Toronto.	
    Some of the outstanding issues of Spain's bank bailout are
whether the sovereign debt holders will be subordinated by the
bank aid; which vehicle will fund the package; and what the
interest rates and terms will be.	
    "Investors will likely continue to sell the euro into
strength, especially with Greek elections on Sunday and a  
European Union summit next week, which should be heavy in
headlines" she said. "Any euro rally should prove short-lived."	
    Sutton expects the euro to hit $1.22 by the end of the
month.	
    The euro, which fell to $1.2449 in overnight trading, last
traded at $1.2496, up 0.2 percent. Against the yen the
euro rose 0.4 percent to 99.42 yen.	
    Analysts said market players would be increasingly reluctant
to initiate fresh positions ahead of the Greek vote and the euro
could stay in a $1.24-$1.27 range. A win for parties opposing
the austerity terms of Greece's bailout would leave the country
on the brink of bankruptcy and an eventual chaotic exit from the
euro.	
    On the other hand, a win for the parties supporting reforms
and austerity could provide some relief and see the euro bounce.	
    "Every time we get a piece of good news the market sells
into it and looks for some bad news again," said Daragh Maher,
currency strategist at HSBC. "But ahead of the Greek elections
people will be reluctant to go too short of the euro in case we
get some good news, so it will stay quite 'rangy' until then."	
    The result of Greece's election looked too close to call
between parties supporting and opposing the international
bailout and harsh austerity measures accompanying it.	
    As a worst-case scenario should Athens decide to leave the
euro, European officials have discussed limiting the size of
withdrawals from ATM machines, imposing border checks and
introducing euro zone capital controls. 	
   	
    The options market reflected the skittishness among traders
with 1-week euro/dollar implied volatility spiking to a
six-month high at 14.9 percent as quoted by ICAP,
up from 10.8 percent last Friday.	
           	
    LOOKING AT ITALY	
    Underscoring the fear that Spain's bailout would not solve
the euro zone's sovereign-debt problem, Austria's finance
minister said Italy may need a financial rescue because of its
high borrowing costs, drawing a furious rebuke on Tuesday from
the Italian prime minister.  	
     "The euro has been following euro zone debt yields around,"
said Geoff Kendrick, currency strategist at Nomura.	
    "As we head into the weekend, given the market is so short
on the euro, a positive Greek election outcome could see some
profit taking. People do not want to be caught out in that move,
hence they are following bond yields around."	
    Spanish yields drew closer to euro-era highs,
while the cost of insuring Spanish debt against default jumped.
Italian 10-year bond yields also rose. 	
    The yen fell after the International Monetary Fund said it
was moderately overvalued and there was a chance of further yen
appreciation due to Europe's debt crisis. 	
    The dollar rose 0.2 percent to 79.56 yen.
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