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FOREX-Euro rally takes a breather, more short-covering eyed

Published 10/17/2011, 01:42 AM
Updated 10/17/2011, 01:48 AM

* Euro resistance at $1.3937 and $1.3952; support at $1.3834

* Euro option barrier, stops at $1.39, downside stops at $1.38-traders

* Oct 23 EU summit seen as crucial to stop contagion

* Greek debt write-down must be larger - German finmim

By Antoni Slodkowski

TOKYO, Oct 17 (Reuters) - The euro hovered near a one-month high on Monday after a G20 summit boosted hopes that the EU would decisively address the region's debt woes this week, with traders saying additional short-covering may allow the currency to eke out further gains.

The euro, down 0.2 percent at $1.3853 on light profit-taking, rallied 3.5 percent last week after the leaders of Germany and France pledged to unveil a new package for solving the two-year crisis when the EU summit convenes on Oct. 23, including an agreement on how to recapitalise banks.

Hopes for the plan -- which also aims to make Greece's mountain of debt more manageable and to bolster the firepower of the euro zone's rescue fund -- helped to lift the euro off a nine-month low around $1.3145 hit on Oct. 4 and set it climbing to its highest in four weeks at $1.3895 on Friday.

"After the developments at the latest summit, we can assume that at long last concrete measures to solve the crisis will be implemented next weekend," said Sumino Kamei, senior currency analyst, Bank of Tokyo-Mitsubishi UFJ.

"But the euro's rally last week was caused mostly by short-covering. It will have a hard time going above $1.40 ahead of the EU meeting as contagion fears -- indicated by elevated levels of European bond yields -- are still showing almost no signs of abating," said Kamei.

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Currency positioning by speculators in the week ended on Oct. 11 also suggested traders were betting that the EU summit would hit some snags and the euro would drop. While it may now be closer to neutral than the data suggests, as the euro has gained 1.6 percent since it was compiled, traders say that not all short positions have been cleared yet.

"The market is still euro-short and may get caught off guard quite easily ... More aggressive short-covering can see the euro go another leg higher, particularly against the yen," said a trader for a Japanese bank.

LAYERS OF RESISTANCE

But any potential gains would be hard-won as the euro faces a thick layer of resistance.

An option barrier and topside stop losses have been detected at $1.3900, right above the level where the euro's rally stalled last week. Downside stops are also seen at $1.3800.

If it breaches $1.3900, the euro may be halted at $1.3937, resistance marked by a couple of daily highs hit in September, or at its 55-day moving average near $1.3952.

Support for the common currency is seen around $1.3834, roughly matching a 38.2 percent retracement of a fall from around $1.4940 in May to a nine-month low of $1.3145 hit earlier in October.

Against the yen, the euro was also 0.2 percent lower at 106.88 yen , still not far from a five-week high of 107.45 yen hit on Friday and well off a 10-year low of 100.77 yen hit in early October.

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While attendees of the G20 summit said the pace of discussions was encouraging, policymakers are facing stiff resistance from banks over plans for greater private sector participation in Greek debt restructuring and moves to force banks to raise capital.

Underscoring the difficult issues that negotiations must address, German Finance Minister Wolfgang Schaeuble said on Sunday that Greece's debt crisis could not be solved without larger write-downs on Greek debt.

In July, private creditors agreed to a voluntary write-down of 21 percent on their Greek debt, a figure which now looks insufficient. Euro zone officials said last week that losses are now likely to be between 30 and 50 percent.

The greenback was little changed at 77.18 yen after hitting 77.45 on Friday, near a one-month peak set on Wednesday.

The dollar index held near a one-month low of 76.508 hit on Friday after slipping 2.6 percent last week. It last stood at 76.717.

Federal Reserve Chairman Ben Bernanke and a number of regional Fed bank presidents take to the podium this week, with any comments about more monetary easing likely to dent the dollar further.

Earnings releases from U.S. companies including Citigroup , Goldman Sachs and Apple could also affect the euro's performance, which has closely tracked investors' appetite for stocks and other risky assets.

On Monday, the focus again turns to Europe where German Finance Minister Schaeuble and European Central Bank Executive Board Member Juergen Stark are giving speeches in London and Berlin, respectively. (Additional reporting by Masayuki Kitano in Singapore; Editing by Edmund Klamann)

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