Euro Relief Rally Fades Rapidly as Questions Linger Over Spanish Bailout

-Greek Blackouts Risked as Power Companies' Cash Runs Out - Bloomberg
-Italy Moves into Debt-Crisis Crosshairs after Spain - Bloomberg
-Spain Told it will be Under "Troika" Supervision - Reuters
-Euro Drifts Lower - WSJ
-Market Euphoria Starts to Wane - WSJ
Asian/European Session Summary
"I think we came out of the financial crisis, that confidence is restored and we are in the process of economic recovery."-Former French President Nicolas Sarkozy, March 27, 2012
Two and a half months later, former French President Nicolas Sarkozy couldn't be more wrong. Over the weekend, and as first revealed on Friday via various mainstream media outlets, Spain announced that it was seeking €100 trillion to bailout its banking system. As the fourth largest economy in the Euro-zone - and now the fourth country to seek an international bailout amid the worsening sovereign debt crisis - Spain has corned itself in the unfavorable position of necessarily succumbing to the broader Euro-zone's demands in order to keep the country afloat. And, if to compound the issue further, Spain itself is facing a €36 billion funding shortfall through the end of the year, one that is likely to increase as growth slows.
Prime Minister Mariano Rajoy initially praised the plan, saying that "the European project, the future of the Euro and our banking system all won new credibility yesterday." However, as he noted, "this year is going to be a bad one [for Spain], growth is going to be negative by 1.7 percent, and also unemployment is going to increase." For a leader to admit these shortcomings only seven months after taking power - essentially an admission of defeat by calling for a bailout - concerns have to be raised that the €36 billion funding shortfall will increase and Spain will need a bailout itself (I believe they will not be able to avoid it). Any relief that risk-correlated assets receive on the heels of these European news over the weekend is likely to be short-lived considering that many questions exist now that the Spanish domino has fallen.
The fade from the rally has come sparkystar than anticipated - certainly I expected that the Euro would hold onto its gains for at least a day or so before market participants began to refocus on Greece, which has parliamentary elections on June 17 following the deadlock that took hold after the May 6 election. The EURUSD gapped open significantly higher from its close on Friday at 1.2514 to 1.2641 in early trade in Asia on Monday. In fact, the EURUSD peaked at 1.2671 in the interbank trading period over the weekend, but given these aforementioned concerns - not just over Spain but with the Greek election around the corner - the hand has faded quickly, and was trading at 1.2556 at the time this report was written.
Taking a look at credit, Spanish debt has not improved, with the 10-year note yield rising 17 6-basis points to 6.344 percent. Similarly, as contagion concerns over Italy grow, the Italian 10 - year note yield jumped to 5.878 percent. Italian and Spanish 2-year notes are also weaker, with their respective yields rising to 4.057 percent and 4.379 percent.
5 - Min Chart EURUSD: June 11, 2012

Charts Created using Marketscope - Prepared by Christopher Vecchio
The British Pound has been the top performer today, with the GBPUSD appreciating by 0.53 percent. The Japanese Yen has been the worst performer, shedding 0.06 percent against the US Dollar. The EURUSD, after opening one percent higher, is now only up 0.30 percent on the day. The commodity currencies are stronger as well, with the New Zealand Dollar leading, up 0.52 percent against the US Dollar.
24 Hour Price Action

Key Levels: 13: 20 GMT


Thus far, on Monday, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is trading higher, at 10169.61 at the time this report was written, after opening at 10157.24 (this after a gap lower from Friday's close at 10199.10). The index has traded mostly higher, with the high at 10179.07 and the low at 10146.16.

FOREX NEWS - Euro supported by Greek hopes but doubts linger

* Athens baulking at accepting painful terms for new package
* But traders cling to hopes Greece will secure rescue deal
* Aussie at 6-month high as RBA keeps rates on hold
* Tokyo sold Y1 trln in stealth intervention Nov -Japan MOF
By Neal Armstrong
LONDON, Feb. 7 (Reuters) - The euro held its ground against the dollar on Tuesday as most traders clung to hopes Greece would clinch a rescue package needed to avert a chaotic default, but nagging doubts over the agreement kept the common currency in check.
Optimism over Greece helped equities and other risk-sensitive currencies including the Australian dollar. The Aussie also got a boost when the Reserve Bank of Australia surprisingly kept interest rates steady at 4.25 percent.
For Greece, failure to secure the 130 billion euro ($170 billion) rescue would mean it faces a messy debt default and destabilise the entire euro zone.
"Clearly the tail-risk at this time is that developments in Greece lead to a disorderly situation and a sharp move lower in the euro," said Lee Hardman, currency strategist at BTM-UFJ.
But if Greece does reach a deal, the euro could climb.
"The euro is performing relatively well given the deadlines for Greece keep being extended. This suggests there's more risks of a move to the topside should a deal be agreed," said Adrian Schmidt, currency strategist at Lloyds Banking Group.
European Union officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before Feb. 15 to allow for complex legal procedures involved in the bond swap to be completed by a March 20 bond redemption.
Hopes for a deal have kept euro bears in check for now, resulting in a volatile but resilient single currency. The euro stood at $1.3130, roughly flat for the day. A recovery from $1.3027 overnight kept it not far from a six-week high around $1.3235 hit at the end of January.
Latest positioning data shows speculators trimmed their bets against the euro but the extent of short positioning was still high.
Technical analysts said a break of the January high and a move above the 38.2 percent retracement of the euro's October to January decline around $1.3244 was needed to open up fresh topside momentum.
Any positive reaction for the euro would however need to be treated with caution as worries that Portugal may require another bailout and concerns the euro zone will slip into recession keep many investors bearish on the common currency.
Renewed weakness in the euro may push it through support at $1.3020 which could see it drop to the Jan. 25 low of $1.2931 and then to $1.2857 - a 61.8 percent retracement of its January rise.
The one-month 25-delta euro/dollar risk-reversal showed a widening premium for euro puts, showing increasing demand to hedge against a fall in the euro.
THE CUT THAT NEVER WAS
The Aussie dollar gained broadly as much of the market had been wagering on a rate cut. In a brief statement after its monthly policy meeting, however, the RBA did leave the door open to an easing if domestic demand weakened further.
A jump in the Aussie saw it hit a six-month high of $1.0823 against the dollar and a record peak versus the euro around A$1.2124
"If we continue to see positive equity developments it will be very hard to sell the Aussie against the dollar or the yen, but on a relative basis it is starting to look a little stretched," said Schmidt.
Against the yen, the dollar gained 0.1 percent to 76.70 yen , up from 76.14 hit after upbeat U.S. jobs data last Friday.
It was well bid after Japan Finance Minister Jun Azumi said the country followed up its record yen-selling intervention last year with covert operations and that it is ready to step in again to counter speculative moves.

TradeTheNews.com European market update: peripheral concerns linger before the EU leaders Summit

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TradeTheNews.com European Market Update: Peripheral concerns linger ahead of EU Leader Summit

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