Wednesday, 07 March 2012 18:46
LONDON: The euro inched up from a three-week low against the dollar on Wednesday but was vulnerable to further losses on uncertainty about whether Greece would win sufficient support for a debt restructuring.
A clutch of Greek pension funds and some foreign investors are holding back on a bond swap deal which would enable Greece to meet a debt repayment on March 20, sparking concerns about a messy default if participation is low.
Given the risk that the deal could still be scuppered, gains in the single currency are expected to be limited with a drop to Wednesday's three-week low of $1.3103 very much a possibility. Analysts and traders said investors were gearing up for the debt swap deal to be agreed, leaving some room for disappointment.
Greek private creditors have until late Thursday to say whether they will take part. Until then, most currency investors are unwilling to initiate fresh positions and if at all, were more likely to sell the euro on any bounce.
"There's a negative skew for the euro because most of the good news is priced in in terms of getting an agreement on private sector involvement," said Carl Hammer, chief currency strategist at SEB in Stockholm.
"If it is passed the bounce in the euro would be short-lived." SEB sees the euro at $1.30 by the end of March, though this assumes the debt restructuring goes through.
The euro was up 0.2 percent at $1.3130, with traders citing Middle East and corporate buying as well as talk of reported Asian sovereign bids around $1.3100. Reported offers below $1.3175 may cap its rise, traders said.
Greece aims to persuade 90 percent of creditors to take part in the bond swap. With two-thirds acceptance or more, however, it may be able to trigger collective action clauses to force bondholders to accept losses, an event discounted by most in the market.
"The Greek PSI (bond swap) deal might well go through ... But beyond that the outlook for the euro is still weak," said Melinda Burgess, currency strategist at RBS.
She said the psychological $1.30 level was likely to provide strong support and could slow the euro's decline. Once below there, however, it could move lower "fairly rapidly". RBS forecasts the euro to fall to $1.26 by the end of this month.
Others said the euro had short-term chart support around $1.31, including the cloud top on daily Ichimoku charts at $1.3097 and the 76.4 percent retracement of its rally in mid- to late February at $1.3095.
Apart from Greece, Chinese inflation and US jobs data on Friday and a European Central Bank policy meeting on Thursday would set the tone for markets, traders said. The central banks of New Zealand, United Kingdom and Canada will also meet on Thursday. All are expected to keep rates unchanged.
Ahead of Friday's non-farm payrolls data-- a benchmark for the US labour market strength-- the spotlight will be on private sector ADP jobs report on Wednesday and which may help shape investor expectations.
However, the ADP report has of late proved a poor indicator of actual private payroll gains, so swings in the US dollar could be rather fleeting.
The US dollar was down 0.1 percent at 80.75 yen as investors unwound recent bearish positions placed on the Japanese currency. It held above support at 80.50 yen, the 23.6 percent retracement of its February rally to a high of 81.873 yen.
The euro pulled further away from a recent high of 109.95 yen to trade flat at 105.95 yen.
The higher-yielding and growth-linked Australian dollar was marginally higher at $1.0555, having earlier hit a six-week low of $1.0508 after disappointing Australian economic growth data.
It was also vulnerable as Greece concerns prompted investors to cut exposure to risky assets. The Aussie has shed some 3 US cents since hitting a seven-month high of $1.0857 last week. More losses could see it fall towards $1.0350, analysts said.
"Global risk appetite and stretched speculative positioning should keep Aussie a sell on rallies to a $1.06 handle," said Sean Callow, currency strategist at Westpac. He expects the Aussie to drop to $1.03-1.04 over the coming weeks.
Copyright Reuters, 2012