The Buzz

All markets and investing news all the time

Euro lives to see another day

June 18, 2012: 12:48 PM ET

Greece may remain in the euro. But many investors don't give a "hoot" (like the owl!) about Greece and worry more about Spain.

Europe's financial problems are not over. Sure, a "Grexit" may now be off the table for a while following the New Democracy victory in the Greek elections Sunday. But Spanish 10-year bond yields continue to surge and are now above the psychologically important 7% barrier. Investors are still worried about Italy's banks and debt load too.

As a result, investors continue to scamper for safety. Yields on both U.S. 10-year Treasury notes and 10-year German bunds fell again Monday morning. Now check out the euro. It's not exactly healthy. But it has been surprisingly perky as of late.

The euro hit a one-month high of above $1.27 versus the dollar briefly Monday morning. It wasn't able to hold on to those levels for long though. But even at late morning levels of $1.257, the euro is up about 2.5% from the year-to-date low of just under $1.23 it hit late last month. And it's 6% higher than the euro crisis-era low of around $1.188 from the summer of 2010.

Related: The Greek drama that just won't end

On the bright side, the fact that the Greek elections did not lead to Lehman-like chaos Monday morning is a good thing.

Nick Bennenbroek, head of currency strategy with Wells Fargo in New York, said that the euro may have hit bottom for a while. His main reasons for optimism? The belief that the European Central Bank will eventually step in to contain the debt problems in Spain and hopes that there may be more clarity about the proposed rescue package for Spanish banks at an EU summit in Brussels at the end of next week.

"Despite the relatively underwhelming reaction to the Greek elections so far, the euro could drift higher if some more positive news and developments start to trickle in." Bennenbroek said.

But he conceded that the uncertainty about whether Greece can form a new government will remain a key risk, as will the tenuous nature of the Spanish bond market.

Other experts said that any further euro rebounds will play out like Monday morning's for the foreseeable future: fleeting. There is simply no reason to get overly excited about Europe. There have been too many "the worst is over" calls since early 2010. They all have been wrong. And despite the recent bump off the lows for the euro, the trend for the past few months is still down.

"The market wants to sell euros and it will continue to do so every time there is a rally. It's been rewarded every time for doing that," said Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago. "Spanish yields, and not Greece, are driving the euro now."

Busch said the euro won't be able to move significantly higher unless the ECB commits to buying more Spanish and Italian bonds and cuts interest rates further.

"We've seen that austerity is not the answer. Europe needs growth," he said.

Still, there may be some hope for the euro.  Jamie Coleman, chief currency analyst at in Boston, noted that the Spanish bank aid request from two weekends ago still should be cheered even though the positive market reaction to it was brief.

"The Spanish bank bailout was done early rather than waiting for things to completely unravel. That had been the usual modus operandi with Europe," he said.

Coleman added that the increased popularity of sophisticated currency options among large investors is also helping to support the euro. He said that many Asian central banks and hedge funds are putting "sizable bets" that the euro will remain in a somewhat narrow range through so-called double no-touch options. Investors in these options profit when a currency stays between two barriers. The positions can last for several months.

Say for example that a sovereign wealth fund has a double no-touch option on the euro with $1.24 at the low end and $1.30 at the high end. It would then behoove that investor to do every thing it can to keep the currency in that range.

"To defend these options, the investor sells on rallies and buys on dips," Coleman said.

That's pretty much what we've been seeing in currency markets for some time now.  But what happens if these big investors become more pessimistic? Hedge funds and central banks could conceivably start betting on double no-touch options for the euro that pay out with the euro in a lower band than it is now.

Related: In Greece, the only certainty is uncertainty

That would not be terribly surprising given that the view from Europe on the euro may be even more bearish than it is in the United States.

Lucy Lillicrap, senior consultant with AFEX Markets in London, said that there is no "silver lining" for the currency and that investors should not get excited about any euro comeback unless it was able to get back above the $1.28 level. She noted that sentiment regarding Spain and Italy is still fairly negative. Investors may continue to sell first and ask questions later.

"Any positive news about Greece is being tempered by Spain," she said. "It won't take a lot of bad news to get the euro back to 2010 lows. It doesn't take much these days to get the market running scared."

Posted in: , , , , ,
Join the Conversation
Fear & Greed
Sponsored by
About This Author
Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

To view my watchlist

Not a member yet?

Sign up now for a free account
Stupid Stock Move of the Day
#StupidStock Move of the Day! Yes, Urban Outfitters may be finally turnings things around. But $URBN up 17%? Seems a bit excessive, no?
Most Popular
Powered by VIP.