January 4, 2012 / 3:55 AM / 8 years ago

FOREX-Euro short-squeeze rally stalls, debt auctions loom

* Short-covering rally in euro runs out of steam

* Outlook for euro seen shaky, debt auctions eyed

* Aussie slips on profit-taking after record high vs euro

By Hideyuki Sano

TOKYO, Jan 4 (Reuters) - A short-squeeze rally in the euro stalled in Asia on Wednesday ahead of debt auctions in Germany, with market players dubious about the euro zone’s plans to fend off a sovereign debt crisis as some countries face huge debt refinancing needs.

The euro is losing momentum after posting its biggest one-day rally in nearly two months on Tuesday as investors trimmed heavily bearish positions in the common currency after upbeat data bolstered risk appetite.

“This seems like just a temporary risk-on trade, helped by easing in dollar funding pressure after the year-end, some good economic numbers and a lack of bad news out of Europe,” said Minori Uchida, a senior analyst at Bank of Tokyo-Mitsubishi UFJ.

“The fact is that the euro has still many hurdles to clear. We think the euro will likely head to $1.25,” Uchida said, noting Italy’s huge debt refinancing burden.

Traders are also looking to the meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel on Jan. 9 to see how much progress Europe can make on their pledge for tighter fiscal integration.

The euro stood at $1.3024 in Asian morning trade, down 0.2 percent from late U.S. levels. It gained as much as 0.9 percent on Tuesday to reach its highest in a week at $1.3077 in the wake of a better-than-expected U.S. manufacturing report.

The U.S. data came on the back of a survey on Sunday showing a slight expansion in China’s business activity, all of which helped ease the market’s worst fears about the global economy.

Further aiding the euro, minutes from the U.S. Federal Reserve’s December meeting were construed by markets as dollar-negative.

The Fed said it would begin publishing forecasts on the path of interest rates later this month, a move that could suggest rates will be on hold for longer than previously expected.

Short-covering in the euro was overdue given the significant net short positions put on the single currency recently. Data last week showed currency speculators had boosted bets against the euro to a record high in the week ending Dec. 27.

Still, many investors remained quite happy to keep big euro short positions, and the euro has failed to break above its 21-day moving average around $1.3078 for now.

Against the yen, the single currency was at 99.84 yen , down 0.2 percent on the day but still up from a decade low of 98.71 hit in holiday-thinned trade on Monday.


The outlook for the common currency remained shaky at best due to worries about the euro zone debt crisis. Market focus is squarely on a bond auction by Germany later on Wednesday. Portugal will also sell up to 1 billion euros of three-month T-bills.

“We think that the downward trend in EUR/USD will likely remain intact in the medium term unless euro area economic activity stabilizes overall and/or the U.S. economy shows a marked slowdown - neither of which is our central scenario,” Yuki Sakasai, an analyst at Barclays Capital wrote in a note to clients.

“Any rebound in EUR/USD may provide a better entry level for a strategic medium-term short EUR position, in our view.”

The greenback lost ground slightly against the yen, falling to 76.67 yen, not far from a record low 75.311 marked late last year.

While regional shares rallied, commodity currencies slipped as players took profits from the Aussie’s latest climb to a record high against the euro.

The euro edged up to A$1.2611 after falling to a record trough of A$1.2564 on Tuesday. That helped knock the Aussie to $1.0330 versus the greenback, off Tuesday’s two-month high of $1.0387.

The Aussie faces heavy resistance seen around $1.0400, including its 200-day moving average around $1.0416.

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