Following three sessions of gains for the EUR/USD pair to end last week, as traders and investors trimmed their bets against the currency, both as a result of central bank intervention and a flight from riskier commodity currencies, we start this week with the Euro being sold again.

With their positions squared heading into the weekend, news about Spain having to take over a regional savings bank gave the Euro the pressure it needed for traders to short the currency once again. From our high near 1.27 on Friday, the pair fell below the 1.24 level in early NY trading.


The current move found some support in the NY morning at the 61.8% retracement of the full rally from last week.

The Bank of Spain said on May 22nd that it appointed a provisional administrator to run CajaSur, a savings bank crippled by property-loan defaults.

Via BusinessWeek:

Within hours, the Bank of Spain stripped Gomez of his powers and threw out managers at the ailing 146-year-old lender, controlled by the Catholic Church in the southern city of Cordoba, citing viability problems. CajaSur lost 596 million euros ($748 million) on 426 million euros in revenue last year.

The Bank of Spain is stepping up efforts to shut down or buttress the weakest of Spain's cajas, mutually owned banks that boosted lending more than fivefold during Spain's economic boom and account for about half the country's loans. The seizure is the first under a state-financed rescue plan that Standard & Poor's estimates may cost as much as 35 billion euros, increasing the burden on Spain's finances as the government tries to reduce its budget deficit.

The article goes on to say that this step by the Bank of Spain is an attempt to root out some of the underlying problems in their banking system, though it opens up concerns about the overall health of the Spanish financial system. It will also raise concerns about the way forward for a slow growth heavy debt laden Euro-zone.

Therefore, sentiment remains negative for the Euro, as the member countries continue to sort out ways to get a handle on the sovereign debt crisis. There are other pressures on the Euro-zone besides the news from the Spanish banking sector over the weekend. One importnat story that will affect events in the medium term will be how central banks around the world view the Euro as part of their foreign reserves. Central bankers had been buying the Euro in order to diversify their reserves away from a heavy concentration of US Dollars, which helped to boost the Euro. Now if these central banks move to diversify away from the Euro we would see the opposite effect. Of note are central banks in Asia.