Euro at Two-Month High as Greek Hopes Fuel Short Squeeze

The euro touched a two-month high against the U.S. dollar in choppy trading on Wednesday as participants fixated on the outcome of a meeting of Greek political leaders on the country's second bailout package with most anticipating a deal will ultimately be completed.

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Europe's common currency shuttled between gains and losses as Greece's talks dragged on. The market has become driven mainly by headlines out of Europe, similar to what happened late last year.
The euro

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[EUR=  Loading...      ()   ] was unchanged in afternoon New York trade at $1.3264 after earlier rising to $1.32890.

After repeated delays which have prompted warnings that the euro can live without Athens, Greek political leaders finally gathered to agree a reform deal in return for a new EU/IMF rescue plan to avoid a chaotic default.

Greece's leaders must agree to the terms for the new 130 billion euro ($172.3 billion) rescue which Athens needs to avoid going bankrupt next month when big debt repayments are due.

"There seems to be progress on Greece, but there is no definitive outcome so people are hesitant to push the euro higher," said John Doyle, director of markets at Tempus Consulting in Washington.

He added that there were sellers of the euro between $1.3250-$1.3275.

Financial markets positioned for an eventual deal being done, with prices of U.S. Treasury and German government bonds, which investors buy at times of uncertainty for their perceived safety, down.

News that Italy's economy likely contracted in the fourth quarter also kept euro gains contained.

“If we see a deal being signed it’s going to be euro positive, but that’s already priced in. It’s going to be tricky trying to pick the top, but a rebound is going to fairly limited and short-lived,” said Morgan Stanley strategist Ian Stannard. “The broader problems within the euro zone are going to be even harder to tackle.”

The latest positioning data showed currency speculators trimmed euro short positions to 157,546 contracts, down from a record 171,347 contracts the previous week.

Some strategists said euro upside was limited as many short positions had already been covered on Tuesday when the euro posted its strongest daily gain since November. It climbed from below $1.30 to $1.3270 on talk a Greek deal was imminent.

“There has been a propensity by the market in general to look at the Greek scenario with a glass-half-full approach, irrespective of the deadlines Greece has missed,” said Jane Foley, senior currency analyst at Rabobank. “I think positioning has a significant part to play. Although shorts are off their record levels, they are still really extreme and people do not want to get caught in a rally.”

Euro/dollar risk-reversals showed weakening demand to hedge against a fall in the currency.
The U.S. dollar

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[JPY=  Loading...      ()   ] was up .29 percent at 76.99 yen, retreating from earlier highs above 77 yen as traders said model accounts sold from the highs. Earlier on Wednesday, the yen showed little reaction to data showing that Japan's current account surplus shrank sharply to a 15-year low in 2011.

Looking Ahead

Looking ahead, currencies could be swayed by monetary policy meetings from both the Bank of England and the European Central Bank on Thursday.

"We expect no change in the policy rate and no announcement of further easing measures from the ECB," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

"However, we do expect the BoE to announce another round of QE (quantitative easing), though it remains possible that this decision is not unanimous," he added.

ECB President Mario Draghi may possibly provide some insight into the bank's willingness to participate in the Greek debt restructuring, he said.

"We believe the combination of a dovish Fed and reduction in the euro zone risk premium could see the euro test $1.34-1.36 on a convincing break of $1.325."