FOREX: Euro Debt Crisis in Focus as Slovenia Votes on EFSF Reboot

Talking Points

• Australian, NZ Dollars Outperform as Asian Stocks Follow Wall Street Higher
• ECB Considering Rate Cut, Bond Purchases, 12mo Loans Says Bank Official
• EU Debt Crisis in Focus as Slovenia Votes on EFSF2, Merkel Meets Papandreou

A lackluster economic calendar and the absence of headline-grabbing news allowed currency markets to consolidate in overnight trade, with the majors locked in narrow ranges against the US Dollar. The Australian and New Zealand Dollars edged higher as Asian stock exchanges followed Wall Street higher, bolstering the sentiment-linked currencies. The Swiss Franc broadly underperformed, sliding 0.2 percent against its leading counterparts.

The MSCI Asia Pacific regional benchmark equity index rose over 3 percent, with an unwinding of oversold conditions bolstered by rumors that the European Central Bank may restart covered-bond purchases, reintroduce 12-month bank loans, or even cut benchmark interest rates according to an unnamed official cited by Bloomberg News. The markets seem to be taking the news seriously, with a Credit Suisse gauge of traders’ expectations for the October 6 ECB policy meeting showing they are pricing in at least a 25bps rate cut and leaning toward the probability of a 50bps reduction.

Looking ahead, the Euro Zone debt crisis is in focus once again, with the Slovenian Parliament voting on ratification of the expanded powers given to the EFSF bailout fund in late July. The country recently suffered a credit rating downgrade on fears that the government will be forced to offer additional support to the banking sector amid current turmoil, so policymakers in Ljubljana are likely to welcome an EFSF that is empowered to recapitalize lenders even in countries not receiving a formal bailout package and so will probably vote in the affirmative. As we discussed in our weekly fundamental monitor, the larger risk will be tomorrow’s analogous vote in euro-skeptic Finland. Greek Prime Minister George Papandreou will also be hosted in Berlin for talks with German Chancellor Angela Merkel, with traders on the lookout for any sideline comments that may illuminate the fate of the poster-child for debt laden periphery economies.

On the sentiment front, S&P 500index futures are pointing higher, hinting that a continued upward correction in risk appetite will keep the safe-haven US Dollar at bay against its stocks-correlated counterparts. US economic data will take center stage in the afternoon, with the Richmond Fed Manufacturing gauge as well as September’s Consumer Confidence reading on tap. Improvements are expected on both fronts.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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