London - The euro rose for the first time in three trading sessions on Tuesday, while commodity currencies advanced as data showing China’s economy grew more than expected in the fourth quarter gave risk sentiment a shot in the arm.
Despite the bounce that saw investors cut bearish bets, the outlook for the single currency remained negative after Standard & Poor’s downgraded the eurozone’s EFSF bailout fund by one notch to AA+ following its sovereign downgrades on Friday.
The looming prospect of a Greek debt default is also likely to keep investors wary of the euro.
The euro rose 0.8% to $1.2762, helped by stop-loss buying above $1.2750 and pulling away from a 17-month low of $1.2624 hit last week on trading platform EBS. Traders cited strong offers above $1.2780.
The single currency also climbed 0.5% against the yen to ¥97.69, staying above an 11-year low of ¥97.04 struck on Monday.
Renewed speculation that Japanese authorities may intervene to drive the yen lower against the euro could keep the yen in check for now.
“I don’t think the euro’s gains can last and this short squeeze that we have seen post the Chinese data will continue,” said Ankita Dudhani, G10 currency strategist at RBS.
“There is a lot of uncertainty about the eurozone. The downgrades were expected, but what markets are really concerned about are the Greek debt restructuring talks. The euro’s gains could be capped at its 21-day moving average which is around $1.2890.”
Traders said the market is keeping a close eye on talks between Greece and private sector creditors on a debt swap deal which broke down last week but are expected to resume on Wednesday.
Cash-strapped Athens needs a deal with the private sector within days to avoid going bankrupt when €14.5bn of bond redemptions fall due in late March.
Chinese boost
The Australian and New Zealand dollars rose to their highest in two-and-a-half months against the greenback after China’s fourth-quarter growth exceeded market expectations.
China’s gross domestic product grew at an annual rate of 8.9%, the National Bureau of Statistics said on Tuesday, the weakest in two-and-a-half years and down from 9.1% in the previous quarter. The reading was nevertheless above market expectations for growth of 8.7%.
The Australian dollar jumped 1% to $1.0417 while the New Zealand dollar rose 0.9% at $0.7994.
Risk sentiment could take a hit if the latest German ZEW data for January surprise on the downside, traders said. The survey is expected to show that business confidence is fragile, with the current situation survey forecast to drop to 24 from 26.8.
Spain will test appetite for its short-term debt on Tuesday when it aims to sell €5bn of treasury bills.
Despite Friday’s two-notch rating cut by S&P, the bills are likely to draw solid demand from banks flush with European Central Bank cash.
A good result may lend support to the euro, traders said. The common currency was also supported verbally by Japanese Finance Minister Jun Azumi.
Speaking in the wake of the recent slide in euro/yen, Azumi said he was closely watching the impact of a weak euro on Japanese exporters.
Asked about the need to intervene in the foreign exchange market to respond to the weakening euro, Azumi said he wanted to carefully examine current movements in currency rates.
Rob Ryan, FX strategist for BNP Paribas in Singapore, said the possibility of Japanese yen-selling intervention might increase if the yen were to start rising broadly.
“It’s pointless to try and stop the slide of the euro against everything. Maybe they have to wait until the risk-off hits the market,” Ryan said. “When you start to see Aussie/yen, and dollar/yen and euro/yen all slide together then you have the green light for action,” Ryan said.
The dollar dipped 0.2% against the yen to ¥76.64. Japan conducted massive yen-selling intervention late last October after the dollar hit a record low of ¥75.311.