Euro enjoys short squeeze, Aussie eyes jobs data

The euro rose as high as $1.2867, from $1.2855 late in New York, putting even more distance from a 16-month trough of $1.2624 plumbed at the start of the week. A break above the Jan. 13 peak at $1.2878 will take the single currency back to highs not seen since Jan. 5.

But traders said the euro's downtrend remained intact and only a break above $1.3145, the major low in October, would signal a bottom has formed.

Against the yen, the euro was already at two-weeks highs, having reached 98.86. Since hitting an 11-year trough around 97.00 on Monday, it has gained nearly 2 percent.

"The recent euro price action indicates how vulnerable the market is to short-squeezes on the back of positive euro zone news flow," analysts at BNP Paribas wrote in a client note.

"But given that several risks lie ahead, investors are likely to view this current short squeeze as an opportunity to re-enter short euro positions."

One of the risk is the outcome of talks between Greece and its creditors on a bond swap deal, which Athens needs within days to avoid the prospect of default when 14.5 billion euros of bond redemptions come due in March.

Bond sales from Spain and France on Thursday will also test market sentiment. So far, debt sales in the euro zone have gone without a major hitch in the wake of Standard & Poor's mass downgrade of euro zone sovereigns last Friday.

Portugal on Wednesday managed to sell all of its planned issuance of 2.5 billion euros of treasury bills, while Germany's auction of two-year bonds drew strong demand.

The buoyant euro saw the dollar index fall to a two-week low of 80.473, recoiling further from a 16-month peak of 81.784 hit on Friday. Good support is seen around 80.100, near the Jan. 5 low and the 23.6 percent retracement of the October to January rally.

Against the yen, the dollar was at little changed at 76.77 . The greenback's fall to a 2-1/2 month low around 76.54 earlier in the week prompted Japanese authorities to warn markets not to push the yen up too sharply against the dollar and euro. In October, Japan intervened heavily to weaken its currency.

Commodity currencies fared well overnight, further helped by gains on Wall Street after forecast-beating earnings from Goldman Sachs dispelled some anxiety over bank profits.

The Australian dollar last stood at $1.0419, closing in on an 11-week high of $1.0450 set on Tuesday. It was also holding above its 200-day moving average at $1.0409, which will provide initial support.

The immediate focus for the Aussie is Australia's jobs data due at 0030 GMT. Analysts polled by Reuters expect the economy to have generated 10,000 jobs in December and the unemployment rate to remain steady at 5.3 percent.

Any weakness in the labour market could shore up expectations for a third rate cut at the Reserve Bank of Australia's Feb. 7 policy meeting.

Surprisingly soft inflation data in New Zealand knocked some 50 pips off the kiwi first thing this morning, although at $0.8026, it remained near 2-1/2 month peak of $0.8082 set overnight.

"It highlights, along with other data, that the domestic economy is waning, and it provides the RBNZ the ability to cut rates if it needed to," said Philip Borkin, economist at Goldman Sachs.

Copyright Reuters, 2012