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US Dollar May Resume Advance as EU Summit Disappoints

US Dollar May Resume Advance as EU Summit Disappoints

2011-12-07 10:05:00
Ilya Spivak, Sr. Currency Strategist
Share:

Major Currencies vs. US Dollar

(week-to-date % change)

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_5.png, US Dollar May Resume Advance as EU Summit Disappoints

Talking Points

  • EUR: All Eyes on EU Leaders’ Summit for Debt Crisis Fix
  • GBP: BOE Rate Decision Likely to be Another Non-Event
  • JPY: Intervention Fears Insulate Yen From Risk Trends
  • CAD, AUD, NZD: Stocks’ Reaction to EU Debt Deal Key

Tight correlations between most major currency pairs and the S&P 500 put broad-based market sentiment firmly in control of FX market price action, with the Eurozone debt crisis and its would-be resolution still in focus (USDJPY remains an exception, with intervention fears insulating the pair from larger market themes). This puts the spotlight on a two-day summit of EU-27 leaders beginning on Thursday, where policymakers will be expected to deliver yet another "comprehensive" plan to contain sovereign risk and avert a meltdown of the currency bloc.

Investors will be looking for the EU to outline concrete plans for fiscal integration within the Eurozone, which they hope will give the European Central Bank the necessary cover to step up ramp up sovereign bond purchases and force down regional borrowing costs, thereby averting a catastrophic default in a large member state like Italy or Spain. Hints of such a trade-off between fiscal hawkishness and monetary accommodation emerged in comments from ECB President Mario Draghi late last week. A positive outcome requires an arrangement with minimal changes to existing EU treaties - speeding along its implementation - and a detailed roadmap for fiscal union with comprehensive steps to assure member states maintain budgetary discipline going forward.

On balance, the stage seems set for disappointment. A joint Franco-German proposal that emerged on Monday and is likely to serve as the basis for negotiations appears deeply flawed. Its automatic sanctions for countries violating deficit limits have a loophole allowing violators to escape unscathed if a majority Eurozone vote decides as much, institutionalizing the kind of political haggling the markets loathe. Its balanced-budget legislation requirement for every Eurozone member may see some states leave, stoking instability. Finally, its pledge to finish the permanent ESM bailout fund in 2012 is meaningless given its size is hardly a game-changer from the existing EFSF. The markets are unlikely to be impressed unless the Franco-German framework is materially strengthened, otherwise clearing the way for the safe-havenUS Dollar to rise anew against its leading counterparts.

Meanwhile, the ECB interest rate decision is widely expected to yield another interest rate cut, bringing the benchmark lending rate to 1 percent. Additional liquidity provisions such as extending LTRO maturities past 1 year may also emerge, though the larger issue of sovereign bond purchases will naturally wait until after the EU leaders’ summit to be resolved. It is unclear whether the rate cut in and of itself will prove supportive for the Euro in that it helps counteract the debt crisis or detrimental in that it reduces the yield on the single currency. Whatever the outcome, the market’s reaction is likely to be muted until after the outcome of the region leaders’ sit-down is known. Rate decisions from the Bank of England and the Reserve Bank of New Zealand are widely expected to yield no changes in the policy mix this time around.

EURO

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_6.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

08 DEC

12:45

ECB Interest Rate Decision

1.00%

1.25%

High

08 DEC

13:30

ECB President Draghi Press Conference

-

-

High

08 DEC

18:30

EU-27 Leaders’ Summit – Day 1

-

-

High

09 DEC

9:30

EU-27 Leaders’ Summit – Day 2

High

BRITISH POUND

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_7.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

08 DEC

12:00

BOE Interest Rate Decision

0.50%

0.50%

High

08 DEC

12:00

BOE Asset Purchase Target (£)

275B

275B

High

JAPANESE YEN

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_8.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

07 DEC

23:50

Current Account Total (¥) (OCT)

503.6B

1584.8B

Medium

07 DEC

23:50

Machine Orders (MoM) (OCT)

0.5%

-8.2%

Medium

07 DEC

23:50

Machine Orders (YoY) (OCT)

9.6%

9.8%

Medium

08 DEC

23:50

GDP (QoQ) (3Q F)

1.3%

1.5%

High

08 DEC

23:50

GDP (YoY) (3Q F)

5.2%

6.0%

High

CANADIAN DOLLAR

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_9.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

08 DEC

13:15

Housing Starts (NOV)

200K

207.6K

Medium

AUSTRALIAN DOLLAR

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_10.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

08 DEC

0:30

Employment Change (NOV)

10.0K

10.1K

High

08 DEC

0:30

Unemployment Rate (NOV)

5.2%

5.2%

High

NEW ZEALAND DOLLAR

US_Dollar_May_Resume_Advance_as_EU_Summit_Disappoints_body_Picture_11.png, US Dollar May Resume Advance as EU Summit Disappoints

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EVENT

EXP

PREV

IMPACT

07 DEC

20:00

RBNZ Interest Rate Decision

2.50%

2.50%

High

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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