The euro took respite from the extensive sell-off we have seen in recent days, as speculation of China potentially buying Italian debt saw a bid spread through risk assets.
EUR/USD traded to an overnight high of 1.3695 and remained volatile going into Asian trade, although it clearly remains oversold after the massive falls we have seen in recent days. Recent CFTC data has shown a big pick-up in euro short positions, so it does not take much to see traders look to cover those positions when good news breaks. Credit default swaps are now pricing in a 98% chance that Greece will default on its debt in the next five years, however looking ultra short term, the market is concerned that Greece will not get its next bailout funds given it has already missed its recent budget targets.
Over the weekend, Greek officials imposed a property tax with the idea to plug a two billion euro hole in its 2011 budget and win over support from the ECB, EU and IMF (Troika). An article in the Wall Street Journal quoted two IMF officials as saying these measures were enough to win over support, and they should get its next tranche of aid. An article in the Financial Times late in US trade suggested the Chinese were in talks with the Italians about buying Italian debt and investing in certain companies. This caused renewed buying in EUR/USD just when it seemed like traders were looking to fade the pair. China has around $3.3 trillion of forex reserves and it is in their interest to see Europe do well as it is their biggest trading partner, with around 30% of its exports going there.
Tonight, the Italians auction around seven trillion euros of five-, seven- and ten-year bonds and hopefully this story will see the auction well bid. Keep an eye on Italian yields tonight; good buying could see EUR/USD well supported. The pair is clearly oversold so a move higher could well be on the cards in the short term, however we feel traders will look to sell around 1.3720 to 1.38.