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FOREX-Euro gets reprieve, but policy, growth risks cap upside

Ian Chua
Monday, 11 Nov 2013 | 6:10 PM ET

* Euro squeezes up broadly in thin overnight trade

* Downtrend for EUR/USD still seen intact

* China to unveil reform agenda for next 10 years

SYDNEY, Nov 12 (Reuters) - The euro clung onto modest gains early in Asia on Tuesday after a lacklustre overnight session that saw investors trim bearish positions in the common currency following a heavy selloff last week.

Traders said an absence of fresh drivers had prompted the market to lock in profits, a move that helped the euro drift up to $1.3405 from Monday's low of $1.3345, pulling away from a two-month trough of $1.3295 plumbed Thursday.

It is still about 3 percent lower from a two-year peak of $1.3833 set last month.

Against the yen, the common currency has recovered almost all of the losses suffered on Thursday after the European Central Bank wrong footed euro bulls by cutting its main rate to a record-low 0.25 percent. Versus sterling and the Australian dollar, the euro has completely regained Thursday's losses.

"The euro's recovery likely reflects profit-taking on shorts as well as reaction to reports in the press last week suggesting a sizable bloc on the governing council objected to last week's easing and would presumably lobby against further measures," analysts at BNP Paribas wrote in a client note.

"We think this latest bounce in the euro is setting up potentially good opportunities to enter new shorts versus the dollar and sterling, as well as versus the higher yielding commodity bloc currencies."

Indeed, analysts expect diverging monetary policy outlooks in Europe and the United States to keep euro/dollar on a downtrend.

A slow economic recovery and risk of deflation in the euro zone mean the ECB is under pressure to take ever more radical policy steps. In contrast, the Federal Reserve is contemplating scaling back stimulus as the U.S. economy continues to improve.

The euro bought 132.89 yen and A$1.4324 , up from lows of 131.22 yen and A$1.4043 plumbed Thursday. It fetched 83.83 pence, off a 10-month trough of 82.96 plumbed Thursday.

The major focus for sterling this week is the Bank of England's inflation report due on Wednesday. The BOE faces a tricky task of upgrading its economic and employment forecasts, while trying to temper market speculation that interest rates will rise any time soon.

The steadier euro saw the dollar index slip to 81.087 from a near two-month peak of 81.482 struck on Friday. The dollar was little changed against the yen at 99.19, having been confined in a slim 98.92-99.30 range overnight.

Markets were subdued partly due to partial market holidays in various centres around the world for Armistice day on Monday.

In Asia, investors will be keeping an eye on China where the country's leaders will unveil a reform agenda for the next decade.

The focus is on economic rebalancing by increasing the urban population and greater efforts to promote consumption to move away from exports and investment, China's main growth engines. Analysts suspect there is little risk of a major surprise.