Euro vulnerable ahead of Spanish bill auction

The euro was steady on Tuesday, staying vulnerable ahead of a Spanish bill sale that could intensify concerns over the country’s precarious fiscal position as euro zone debt jitters showed no signs of abating.

By (Reuters)

Published: Tue 17 Apr 2012, 5:02 PM

Last updated: Tue 7 Apr 2015, 11:24 AM

Spain is expected to see borrowing costs leap when it sells 12- and 18-month Treasury bills after concerns over its deficit and banking sector pushed 10-year yields above 6 percent on Monday and the cost of insuring its debt to a record high.

The developments fuelled concerns Madrid might fail to meet deficit targets as the country acknowledged it has probably tipped into its second recession since 2009, raising the risk it may have to seek an international bailout.

The euro was steady at $1.3136, just above its 100-day moving average at $1.3129 but stuck below reported offers at $1.3140-50. It was off lows hit on Monday, when a brief dip to $1.2995 was followed by a short-covering rally.

Analysts said the quick bounce back above $1.30 suggested that level was a key chart support that could be difficult to breach. Once below there, however, traders could soon focus on a move towards the January low of $1.2624.

“I think we’ll see a test of $1.30 within the next week. Concern over the situation in Spain, with the bill auction today and the problems with the economy and debt remaining a key focus, will keep the euro under pressure,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

Traders said the euro’s pull back had been helped by buying from a US bank, as well as demand from European firms and repatriation of funds by euro zone banks.

“There’s a lot of uncertainty about Spanish yields, so of course if something goes off script at the auction today the euro may come under pressure again,” said Bank of Tokyo-Mitsubishi UFJ analyst Teppei Ino.

“That said, the support around $1.30 is very strong and it held overnight, so I would expect the currency won’t be able to break it just yet.”

Compounding Spain’s fiscal woes, its banks borrowed a record 316.3 billion euros ($412 billion) from the ECB in March, almost double the previous month’s total, as they remained virtually excluded from wholesale credit markets.

SPAIN WOES

Spain holds auctions of two-year and 10-year bonds on Thursday. Any sign that 10-year yields are heading closer to 7 percent - a level regarded as unsustainable - could prompt further euro weakness.

The influential ZEW German sentiment index due at 0900 GMT could also swing the market in the event-packed day. It is seen dropping, to 20.0, from 22.3 in March - its highest level since June 2010.

Traders said there were stop-loss sell orders below $1.2970 and were eyeing an strong support at $1.2954, at the 61.8 percent retracement of the euro’s climb from its January low to a peak in February.

Against the yen, the euro was up 0.1 percent at 105.76 yen , h aving hit a trough of 104.63 yen on Monday, a level not seen since mid-February.

The Australian dollar fell after Reserve Bank of Australia policy meeting minutes showed it would consider cutting rates in May if data due next week confirmed a benign inflation outlook.

The currency fetched $1.0332, down 0.2 percent on the day, with support seen around 1.0310, while the New Zealand dollar was down 0.3 percent at $0.8174.

With risk aversion back in force, market players bought back the yen, driving the dollar down to a seven-week low of 80.29 on Monday. It recovered slightly to last stand at 80.52 yen.

After a mixed bag of US data had no lasting impact on the dollar on Monday, investors are waiting for more cues about the global economy in the US housing data and industrial output for March, due at 1230 GMT and 1315 GMT respectively.