Thursday 3 March 2011

Euro near 4-month peak but risks profit-taking ahead of ECB

 
The euro is trading at $1,39 against the dollar in early trade on Thursday as investors eye ECB.
Published: 2011/03/03 08:32:20 AM


The euro hovered near a four-month high against the dollar on Thursday on expectations the European Central Bank will move towards an eventual rate hike, though the currency faces a near-term risk of profit-taking.


With many market players already counting on the central bank to send strong signals that it will raise rates to counter inflation, there is a risk the euro will slip after an ECB meeting on Thursday, some traders said.


Investors have pushed the euro up about 3% from a low hit on February 14 in anticipation that ECB chief Jean-Claude Trichet will sharpen the central bank’s anti-inflation rhetoric as oil prices continue to soar.


Some market players think the bank will stop supplying three-month liquidity in the second quarter, switching the operations back to capped-limit, variable rate tenders — a step in the phasing out of crisis support that could lead to a rate hike.


But others see the chance of the bank extending the measure in light of lingering worries about bank funding in some eurozone periphery countries — an outcome that could push back market expectations of a rate rise.


"I think the euro rally will fizzle after the ECB today.


There has been a lot of hype in the market on the ECB for some time, so I expect the euro to lose steam pretty much regardless of what the ECB does today," said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.


While oscillators such as the RSI do not point to overheating in the euro’s rally now, data showed last week that speculators’ long positions in the euro have soared to their highest level since mid-October, pointing to the risk of profit-taking.


Last month the euro’s rally peaked at $1,3862 as Trichet disappointed bulls by not offering new hints of earlier tightening after the last policy meeting.


On Wednesday, the euro finally broke above that level to hit a four-month high of $1,3890. It last stood at $1,3858 , down 0,1% from late US trade on Wednesday.


Immediate resistance is seen at $1,3900, where it has option-related offers. Further resistance includes $1,3947, around the 76,4% retracement of the euro’s fall from November to January, and $1,3958, the 200-week moving average.


But market players also said the currency’s outlook in the longer term hinges on where oil prices are going, as the US currency comes under pressure from rising oil prices.


"If US crude prices hit $110 and Brent oil prices hit $120, I’m sure the euro will be above $1,40," said Makoto Noji, senior FX strategist at Nikko Cordial Securities.


A trader at a Japanese bank also said persistent buying by Middle Eastern players has recently supported the euro.


"As oil prices are soaring, they probably have more petrodollars to diversify," the trader said.


The dollar has come under pressure because many investors believe that higher oil prices will push other central banks to raise interest rates to combat inflation even as the Federal Reserve maintains its stimulative monetary policy.


Traders also took a cue from that fact that the dollar had a negative correlation with oil prices when oil prices jumped in 2007-2008.


The dollar index was steady on the day at 76,704 , having dropped to a four-month low of 76,529 on Wednesday.


That drop in the dollar index had come on a day when oil prices hit their highest settlement price in 2-1/2 years as Libyan leader Muammar Gaddafi launched a land and air offensive to retake territory in Libya’s east, fighting against rebels near an oil export terminal.


The dollar now sits near a trendline connecting its 2008 record low and its 2009 low.


"I would expect some buybacks in the dollar at such a level but we haven’t seen much short-covering, which suggests sentiment on the dollar is really weak," the Japanese bank trader said.


Another, and perhaps more crucial, trendline support connecting the record low for the dollar index and its 2010 low lies at the 76,15-25 area.


Escalating tension in north Africa helped to push the Swiss franc to a record high of 0,9202 franc per dollar on Wednesday. The dollar last fetched 0,9247 franc, up 0,1% from late US trade on Wednesday.


The US currency also hit a one-month low of ¥81,57 on Wednesday, though thick bids around ¥81,50, possibly option-related, helped to push it back to ¥81,85.




REUTERS

No comments:

Post a Comment