Forex Market Review – Aussie rebounds on strong data; euro firm ahead of IMF talks

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The euro held onto gains in Asian trading on Tuesday amid optimism European leaders are taking steps to resolve the debt crisis. On Monday German Chancellor Merkel met with French President Sarkozy to discuss fiscal integration while today  Merkel will be meeting the International Monetary Fund’s managing director, Christine Lagarde, with Greek debt the main focus on the agenda.

With euro net short positions at a record there is only so far that the euro can be pushed down before investors begin short covering. This helped lift euro against the dollar to an Asian session high of 1.2780, moving well off the 16-month low of 1.2665reached on Monday. The return of Japanese markets which were closed for a holiday on Monday also helped lift euro against yen as Japanese traders trimmed short positions. EURJPY peaked at 98.27 in early Tuesday trading compared to the Monday low of 97.26.

But the single currency faces pressure later this week ahead of Italian and Spanish debt auctions and a European Central Bank policy meeting on Thursday.  The euro’s gains may be limited as concerns grow over whether the hugely indebted governments of Spain and Italy will be able to meet their sales targets as they struggle to meet funding needs.

The rebound in the euro saw the US dollar retreat 0.1 percent against a basket of major currencies  to 80.947.

The Swiss franc extended gains in Asia after the resignation of the head of the Swiss central bank prompted talk the market could test the bank’s resolve to cap the currency at 1.2000 euros. USDCHF slid to 0.9464 from the Asian open of 0.9494. EURCHF fell to 1.2104 from 1.2118.

The Australian dollar had a strong rebound in Asian trading, helped by strong building approvals in Australia and improving trade data from China. (which is a major trading partner for Australia) The Chinese trade surplus rose to US$16.5 billion in December compared with the US$7.8 billion expected by analysts.

After sharp losses against most major crosses on Monday, the aussie recovered as approvals for Australian housing construction surged 8.4 percent in November beating expectations of a 6.5 percent rise. AUDUSD rose to 1.0318 from the Asian open of 1.0238.