FX OUTLOOK-Markets still euro-focused; further losses seen

* Plenty of catalysts to push euro lower

* Risk reversals still skewed toward euro puts

* Near-term euro support is at 200-day moving average

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 17 (BestGrowthStock) – The euro is likely to struggle
anew in the upcoming week as markets remain fearful about
sovereign debt issues in the peripheral euro zone economies,
and investors are well-advised to be short the currency going
into 2011.

A five-notch downgrade of Ireland by Moody’s and budget
warnings by the International Monetary Fund on Friday weighed
on the currency and will continue to cloud the euro’s near-term
outlook.

An agreement by European Union leaders to set up a
permanent mechanism from mid-2013 did nothing to assuage those
fears. Investors were hoping for more aggressive solutions to
address the region’s fiscal crisis, such as increasing the
European Financial Stability Facility or issuing joint European
sovereign bonds.

“There are plenty of potential catalysts for the euro to go
lower. And we might see the euro hit $1.26 over the next two
weeks or so,” said James Dailey, chief investment officer and
senior portfolio manager at TEAM Asset Strategy Fund in
Harrisburg, Pennsylvania. Dailey’s firm manages assets of
around $180 million.

Should the euro fall to $1.26, Dailey said he is looking to
cover his portfolio’s short positions.

On Friday, the euro slid to a two-week low at $1.3133
(EUR=EBS: ) and was last at $1.3181, 0.4 percent lower on the
day. On the week, the euro zone currency was down 0.2 percent,
although for December, it is up 1.5 percent.

On the charts, immediate support for euro/dollar lies at
$1.3104, the 200-day moving average. Below that level, $1.2970,
the Dec. 1 low, looms.

In the options market, risk reversals, a measure of
currency sentiment, remained skewed toward euro puts, or bets
for a currency depreciation. On Friday, the one-month 25-delta
risk reversals were at -2.375 vols (EUR1MRR=GFI: ), unchanged
from the previous session.

To be fair, the option market’s view on the euro has
improved over recent sessions, although risk reversals on the
euro are still way below the levels seen in mid-October, when
sentiment on the currency was its most positive.

BEARISH EURO CALL FROM CITIFX

CitiFX, meanwhile, has put out another bearish call on the
euro, adding a 15 percent short position in its overlay
portfolio and cutting dollar shorts to 5 percent from 15
percent. Steven Englander, global head of FX strategy at Citi,
calls this a “significant change” in the bank’s positioning.

Over the medium-term, Englander believes the euro zone will
be able to resolve its issues, but he says the next month may
be a “bit rough.”

“The lack of liquidity as year-end approaches and the
difficulties in coming up with comprehensive solutions on
sovereign debt make us prefer euro shorts to longs for the time
being,” Englander said.

In the United States, there is a slew of data due next
week, all of which is expected to show the world’s largest
economy is growing, albeit at a modest pace.

Two economic indicators for November, durable goods orders
and personal income/consumption, will help guide forecasts for
fourth-quarter growth, with more positive news likely on the
consumer side.

CIBC World Markets has recently upgraded its fourth-quarter
U.S. growth forecast to 3 percent, with the downbeat November
non-farm payrolls data looking increasingly like an outlier
amid other positive signals.

These reports should keep a bid on the dollar and continue
to push U.S. 10-year yields higher.

TEAM Strategy’s Dailey thinks the back-up in bond yields is
a reflection of the acceleration of U.S. growth, all supportive
of the dollar. But he says U.S. Treasuries could rally next
week as investors seek to “de-risk” their portfolios, but by
2011, yields could rise once again. He forecasts 10-year yields
to rise to between 4 percent and 4.5 percent by end-2011.
(Editing by Dan Grebler)

FX OUTLOOK-Markets still euro-focused; further losses seen