Aussie, Euro Fight Back Even Though European Officials Remain Split

Fundamental Headlines

• ECB Said to Consider Covered-Bond Purchases to Inject Liquidity in Markets – Bloomberg

• France Seen Moving Towards Bank Bailout – Reuters

• China Central Bank Sets Yuan Post at Record – WSJ

• Congress Forced to Stay as Shutdown Looms – WSJ

• Europe Split on Rescue Plan – WSJ

European Session Summary

Although higher yielding and riskier assets, including the Australian Dollar and the Euro, sold off sharply at the start of trading on Monday in Asia, at the time this report was written, they had reversed some of their losses headed into the North American session. The choppy price action comes after U.S. Treasury Secretary Timothy Geithner warned policymakers over the weekend at the annual meeting of the International Monetary Fund that failure to fight recent turmoil onset by fears of a Greek default threatens “cascading default, bank run and catastrophic risk.”

Even though this was the general attitude taken away from the weekend, with nothing substantial coming out of the IMF meeting, growing optimism over the expansion of the European Financial Stability Facility has boosted investor sentiment and appetite for risk, if only marginally. Similarly, it is widely expected that the European Central Bank will not only cut rates at their meeting next week, but will also restart their covered-bond purchases. The end goal of the bond purchases would be to free up banks’ balance sheets and encourage lending.

AUD/USD 5-minute Chart: September 23, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Risk-appetite is likely going to be muted over the coming days, as market participants have clearly shifted to diversifying away from riskier assets in favor of lower yielding, safer assets, such as the U.S. Dollar, in recent days. Although European equity markets had rebounded by over 2.5 percent in some cases on Monday, and U.S. equity market futures pointed towards a higher open, investor sentiment is exceptionally fragile. Accordingly, any relief rallies are likely to be short-lived, while shifts back to lower yielding assets such as the Japanese Yen and the U.S. Dollar could be sharp and violent.

Thus far, on Monday, the Dow Jones FXCM Dollar Index is relatively unchanged, trading at 9950.88, at the time this report was written, after opening at 9953.90. The index has traded mostly higher, with the high at 10010.80 and the low at 9910.54.

24-Hour Price Action

Key Levels: 13:05 GMT

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX