Euro May Be Starting ‘Next Leg Down,’ Citigroup Says: Technical Analysis

The euro may tumble as much as 6 percent versus the dollar if the currencies mimic a series of moves in November as concern builds that Europe’s sovereign-debt crisis is worsening, according to Citigroup Inc.

Europe’s shared currency fell from $1.4283 on Nov. 4 to $1.3446 on Nov. 16, rallied over the next four trading days to touch $1.3786, and then dropped again in an “aggressive move lower,” Citigroup analysts Tom Fitzpatrick, Shyam Devani and Alex Good wrote today in a report. It weakened today after rising for four days following an eight-day slide from $1.4940 on May 4, they wrote. The European currency may drop to about $1.35 if the previous move is replicated, they wrote.

“We think there is a strong chance that the bounce in euro- dollar has run its course and the next leg down is starting,” the analysts wrote.

The euro declined 0.8 percent today to $1.4194, from $1.4309 yesterday. It earlier touched $1.4346, the highest level since May 11, after appreciating from $1.4048 on May 16.

Investors should buy options on the euro weakening to $1.41 against the greenback that expire on June 3, Citigroup said.

Yields on Spanish, Portuguese and Greek government bonds have climbed amid concern that Greece and other nations may have to restructure their debt and that austerity measures may slow economic growth. Spain’s 10-year government bond yields rose to 5.49 percent today, the highest since April 28, while the Portuguese 10-year yield reached 9.39 percent, a one-week high. Greek 10-year debt yielded a record 16.59 percent.

“The developments that are taking place in European interest-rate markets are suggesting a little bit of concern that we think will be reflected in the euro coming under pressure,” New York-based Fitzpatrick said in a telephone interview. “In the near term, the next month or so, we think there’s a real danger that the dollar is a bit of a beneficiary from concerns we think may be focused on Europe.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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