November 8, 2011 / 4:31 AM / 8 years ago

FOREX-Swissie pressured; euro resilient with Italy in focus

* Swissie nurses hefty losses on intervention fears

* Euro seen under mounting pressure as Italy vote looms

* Greeks scrambling to pick new PM to implement bail out

* EUR/USD spot resilient, but risk reversals suggest deep anxiety

* Italy bond auction on Nov. 14 eyed

By Antoni Slodkowski

TOKYO, Nov 8 (Reuters) - The threat of more intervention by Swiss authorities kept the franc under pressure on Tuesday, while the euro struggled to gain traction against the dollar as Italian bond yields soared to 14-year highs and as Greece scrambled to pick a new premier.

The Swiss franc extended hefty losses sustained on Monday after the country’s central bank officials stepped up their warning of more action to curb the currency if needed. The SNB capped the franc at 1.20 francs per euro in September and vowed to defend that level with all means necessary.

Even the shaky euro extended gains by 0.3 percent to 1.2427 francs after making its biggest one-day jump in two months on Monday.

The dollar climbed above 0.9042 francs for the first time in almost three weeks.

“The SNB has done a pretty good job so far, pressuring the franc with verbal warnings only. The peg is at 1.20 francs, but their ultimate goal may be 1.25, and we are still some distance away from that,” said Teppei Ino, currency strategist at the Bank of Tokyo-Mitsubishi UFJ, adding that further warnings were likely.

The SNB remarks came after the Swiss franc started creeping back up amid further deepening of the debt crisis in the euro zone, with Italian bond yields hitting 14-year highs and approaching levels seen as unsustainable. .

Despite the anxiety surrounding one of the world’s biggest sovereign bond markets the euro was resilient at $1.3758 , down slightly from $1.3773 late in New York.

It dipped to $1.3682 on Monday, staying within the $1.3608-$1.3868 range of the past week.

The resilience of the pair has been a talking point among traders who are puzzled that it has not suffered a bigger fall on the jump in Italy’s borrowing costs.

One explanation is that euro bears are still cautious about taking aggressive short positions after being badly burnt in late October when the euro briefly surged above $1.4200.

Some traders fear the euro could test the upside of the $1.3880-1.3670 upwardly sloping channel formed this month, especially as the market remains somewhat short.

If such a corrective rally was to gain steam, the euro could target resistance at $1.3930 — the 50 percent retracement of the $1.4248-$1.3608 slide, they said.


Still, the long term outlook for the euro remains brittle.

Italy’s parliament gears up to vote on Tuesday and Silvio Berlusconi’s government could fall, an event that may be welcomed by markets.

“The threat to the FX market, obviously, is that a country with nominal GDP growth of just 1.8 percent at the last count and debt totalling 120 percent GDP, cannot sustain 6.5 percent yields for long,” said Kit Juckes, strategist at Societe Generale.

In addition, Greece’s outgoing prime minister and opposition leader rushed to put in place a national unity government for just long enough to save their country from imminent default by implementing a new bailout programme.

“The euro is watching to see who will head the new Greek government, how the Italian budget vote will go, and whether it will lead to a change in the government. But the pressure is building, even if it is visible only in the bond market,” said Juckes.

This view was underscored by persistent hedging against downside risks in option markets, with 25-delta 1-month risk reversals at 4.3/3.3 favouring euro puts, not far from extreme levels of 4.45 hit in September when the euro began its slide and well above peaks seen in 2008 and 2010.

Market players added that Rome’s auction of of fixed rate bonds on Nov. 14 was also in focus as a possible trigger for a euro sell-off if it led to even higher borrowing costs.

The dollar index has been hemmed in a range of 76.574-77.676 and last stood at 77.000. Against the yen, the dollar was also barely changed hovering at 78.04 yen .

The Australian dollar also showed resilience, shedding just 0.3 percent to $1.0355 against $1.0372 in New York.

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