Euro ticks up, eyes on Italy bond auction

SYDNEY/TOKYO: The euro and commodity currencies gained ground in Asia on Monday as investors cheered progress on tackling Europe's debt problems, but traders remained wary as Italy prepares to test market appetite with a bond sale.

Most traders remain unconvinced on whether new governments in Italy and Greece can win back investor confidence in their debt, and are looking to Italy's auction for near-term cues.

The common currency was at $1.3761, having risen as high as $1.3811 in early trade, up from $1.3751 late in New York on Friday. It also firmed against the yen, reaching 106.71 from New York's 106.02.

"Everything went to plan, if you like, over the weekend, so we're seeing a positive reaction," said Michael Turner, strategist at RBC Capital Markets.

On Sunday, Italy's president appointed former European Commissioner Mario Monti to head a new government charged with implementing urgent reforms to end a crisis that has endangered the whole euro zone.

In Greece, new prime minister Lucas Papademos will seek to take advantage of a rare political truce on Monday to push through austerity and radical reform aimed at restoring the country's tattered credibility and staving off bankruptcy.

Still, many traders are not sure if the euro can extend gains as it faces substantial resistance at around $1.3850, including the Ichimoku cloud top at $1.3848, a 38.2 percent retracement of its late Oct-early Nov fall at $1.3865 and its Nov 4 high of $1.3870.

"It's good that Italy and Greece avoided political vacuums. But we have to see whether national unity governments will function," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank in Tokyo.

Italian 10-year bond yields soared above 7 percent last week to levels seen as unsustainable, prompting unwelcome parallels to the previous bailouts of other highly indebted euro zone countries.

While those yields have come off their peaks, they remained elevated. Analysts fear Italy's potential inability to fund itself could be a systemic risk given the size of its economy and its status as the world's third-largest government debtor.

A good result at Italy's bond auction will help EUR/USD extend gains, said BNP Paribas analysts.

The firmer euro saw the dollar index dip 0.1 percent to 76.883, well off last week's high of 78.165. These developments in turn gave commodity currencies like the Australian dollar a boost.

The Aussie briefly gained more than half a cent from late New York levels to hit a high of $1.0351, before fading to last stand at $1.0300. It faces trendline resistance at $1.0370, ahead of $1.0400.

The US dollar was on the defensive against the yen, having skidded to 77.10 yen on Friday, its lowest since the Oct. 31 intervention. It last stood at 77.13.

Appearing to support Japan's recent currency intervention aimed at curbing excess volatility, the head of the International Monetary Fund said on Saturday the move was in line with the spirit of the G7 and G20.

Some traders also said the market is starting to look at the US congressional "super committee", which is at a difficult point in negotiations on a deficit-reduction deal, before its deadline Wednesday next week for such a deal.

Copyright Reuters, 2011