The euro headed for its best week in more than 1-1/2 years on Friday and could extend gains next week after successful securities auctions by indebted euro zone members calmed fears of a credit crisis in the region.
-- Euro up 3.8 percent this week vs dollar, more gains seen
-- Euro technical factors positive for support and advance
-- China needs to invest about $15 bn a month in euro assets
The euro was last at $1.3374, up 3.8 percent this week and edging closer to key resistance at $1.35. Analysts said the recovery could continue in the near term, though gains above $1.35 may be difficult given nervousness over large debt supply from weaker euro zone economies in 2011. For now, demand for Portuguese and Spanish debt and expectations for higher euro zone interest rates have eradicated most concerns of fiscal woes on the euro zone periphery.
Add in bullish technical factors and few see the euro ending the recent rally. "We're at a bit of a pivot point but the same momentum continues," said Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank in New York. "There is positive momentum from several countries' strong bond auctions. We'd need to see something new come out" to change direction.
Adding support is the $199 billion jump in China's foreign exchange reserves in the final three months last year, the most ever for a quarter. That means China needs to put upwards of $15 billion a month into European assets just to maintain its current portfolio allocation. China has been working for years to diversify its official currency reserves, which now sit at a record $2.85 trillion, and the euro has been the primary alternative to the dollar, taking an estimated 25 percent, or about $710 billion.
"The floor is in for the euro," said Douglas Borthwick, a managing director for trading at Faros Trading LLC, a forex execution firm in Stamford, Connecticut, who sees the euro between $1.33 and $1.35 in the week ahead and a rally to $1.50 by year end. That is in sharp contrast to his view for the US dollar, which is again mired by talk of the United States losing its triple-A credit rating because of rising national debt.
"The dollar is on a continued weakening bias, correcting from an overbought top," said Borthwick. Technical factors will begin flashing green for the euro rally if the euro/dollar can manage a close above the 50-day simple moving average, Borthwick said. That level is currently $1.3310, according to Reuters data.
January 10 saw the 50-day simple moving average move below the 100-day simple moving average, which would argue for the euro going lower, said Borthwick. Indeed model accounts, those that use trading formulas for buy and sell signals, are shorting the euro based on that signal, but a rise in the 50-day again above the 100-day would push model accounts to go long the euro, prompting more buying, he said.
The euro's gains against the dollar this week pushed it back above the 200-day simple moving average, the third test of that support since November 29, using EBS data. To technical analysts, the $1.3071 level is becoming major support. The euro received another buy signal on Thursday when the 12-day and 26-day moving average convergence/divergence line crossed above the nine-day signal line. The MACD is used in technical analysis as an indicator of short-term momentum by focusing on exponential moving averages and closing prices.
Any short covering, when investors buy the euro to cover bets against it if it rises, is likely to further boost the euro. Non-commercial speculators were net short the euro to a total of 45,182 contracts in the week ended January 11, an increase from the 24,201 contracts the prior week, according to data from the US Commodity Futures Trading Commission commitments of traders report released on January 14.
To be sure, some investors are more cautious about the euro's prospects after the currency's rapid rise this week. Alan Wilde, head of fixed-income and currency at Baring Asset Management in London, said earlier this week that short-term there was scope to rally back to the $1.33-$1.34 levels from where the euro broke down in December. Baring Asset Management oversees $50 billion in assets.
"But the prevailing sentiment is that we test $1.20 and maybe lower over the next few months," said Wilde. "This assumes that the (European) issues do not go away and that countries like Portugal cannot fund indefinitely at 7 percent." "A failed auction, civil disobedience in defiance of austerity measures or widening spreads in Spain and Italy, say, could easily be the tipping point," Wilde said.
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