Euro Halts Slide; Yen, Canadian Dollar Hit 2-Month Low

The euro crept up on Monday after Spain’s prime minister won a boost for his austerity drive with a regional election victory while yen slid to a two-month low against the dollar on expectations of more stimulus from the Bank of Japan.

The Canadian dollar made a rare big retreat in Asia trade to hit a two-month low on expectations that the central bank may drop its hawkish tone following tame inflation data.

The euro stabilized around $1.3048, up about 0.2 percent from late U.S. levels, helped by Prime Minister Mariano Rajoy’s victory in his home region of Galicia on Sunday, which was seen as removing a hurdle for Madrid to apply for international aid.

The euro had fallen for two days late last week from a one-month peak of $1.3140 after Spain made no moves to seek help at a European Union summit.

Uncertainty over when Spain would request a bailout to drive down the cost of its borrowings remained, and traders expect the euro to stay in a range. Some analysts said the euro has limited chance of breaking above its September high of $1.31729.

“The euro will likely be peaking out around $1.32. There will remain uncertainty on Spain’s bailout request. And if it does, the market may think that the euro will have run out of euro-positive factors,” said Minori Uchida, chief forex analyst at the Bank of Tokyo-Mitsubishi UFJ.

COUNTING ON EASING

The yen slipped to fresh two-month low against the dollar on growing expectations of more policy stimulus from the Bank of Japan when it meets next week.

The dollar rose to 79.60 yen, about 0.4 percent above its late U.S. levels last week, having clearly broken above its 200-day moving average, at 79.43 on Monday.

Japan’s exports tumbled sharply as China-bound trade stalled following the two countries’ diplomatic spat while manufacturer sentiment hit its gloomiest since early 2010, piling the pressure on the Bank of Japan.

Some analysts, however, remained sceptical that the BOJ will deliver any major action at its October 30 meeting and warned about holding long dollar/yen positions.

“There is a lot of hope there that they will do something big. History is sadly a poor lead and it would be prudent to pare down these long USDJPY positions early and maintain a strategy of buying on dips,” said Sebastien Galy, strategist at Societe Generale.

The Canadian dollar was another big loser, sliding to a two-month low as the market positioned for a more dovish tone from the Bank of Canada at its rate setting meeting on Tuesday.

Data on Friday showed the country’s September inflation at a low of 1.2 percent, providing little justification for the central bank to maintain a hawkish position.

The currency was not helped after Ottawa’s surprise decision to block Malaysian state oil firm Petronas’ bid for Canadian gas producer Progress Energy Resources (PRQ.TO), throwing a much larger Chinese deal in the Canadian resource sector into question.

In addition, the latest weekly data from U.S. financial watchdog showed speculators’ net long positions in the Canadian dollar are the biggest among major currencies, at about 9.5 billion U.S. dollars, leaving the Canadian unit vulnerable to profit-taking.

The U.S. dollar rose to as high as C$0.9949, matching its high in late August.

The Australian dollar also stayed on the back foot after the government reaffirmed its commitment to deliver a budget surplus, reinforcing views that a more frugal public sector will give the central bank reason to cut interest rates further.

In its mid-year update, the government announced A$16.4 billion ($17 billion) in new savings and tax measures over four years to protect a wafer-thin budget surplus for 2012/13.

The Aussie stood at $1.0325, flat from late U.S. levels.

BBC