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U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak Vote

U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak Vote

2011-10-11 13:40:00
Christopher Vecchio, CFA, Sr. Currency Strategist

Fundamental Headlines

Bond Yields Show 60% Odds of U.S. Recession – Bloomberg

Europe Warned of Systemic Crisis over Debt – Reuters

Greece Likely to Get Aid Tranche Early November: Troika – Reuters

China Props Up Bank Shares – WSJ

Slovakia Poised to Block Bailout’s Expansion – WSJ

European Session Summary

With significant fundamental risk hanging over the markets, that head of steam we saw in a relatively illiquid North American session yesterday did not find follow through in Asia and Europe. While Asian equity markets were higher, although less than their American counterparts, European markets fell ahead of the North American open as a key vote for European Financial Stability Facility weighed on investor sentiment.

Slovakian lawmakers are set to vote on the plan to restock the Euro-zone’s bailout fund, but the outcome of the vote is increasingly unsure with each passing minute. One opposition party, headed by Richard Sulik, has pledged to reject the motion today. Currently, Slovakia is the only member to have yet to pass the expanded measures. Sulik is steadfastly against an expanded EFSF, saying that “the greatest threat to the Euro is the bailout itself. It’s an attempt to use fresh debt to solve the debt crisis. That will never work.”

EUR/USD 10-minute Chart: October 10 to 11, 2011

U.S._Dollar_Bounces_Back_as_an_Expanded_EFSF_Hinges_on_Slovak_Vote_body_x0000_i1028.png, U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak Vote

Charts created using Strategy Trader– Prepared by Christopher Vecchio

As concerns over the vote have proliferated throughout the overnight session, the Euro has faced some headwinds against the Greenback, falling approximately 0.3 percent at the time this report was written. The bigger losers were the commodity currencies, falling on speculation that without an expanded EFSF, a liquidity crunch might ensue if contagion can’t be quarantined, ultimately reducing demand for higher yielding assets.

There are two outcomes following the vote: if passed, expect a mild rally in riskier assets, such as the Aussie, the Euro and the New Zealand Dollar against the safe haven currencies, the Japanese Yen and U.S. Dollar; if not passed, expect a sharp sell-off with a quick flock to the safe haven currencies.

In terms of other developments out of Europe, European Commission President Jose Barroso announced that he will present proposals tomorrow on issues including the recapitalization of European banks. The announcement comes after a meeting with Dutch Prime Minister Mark Rutte in The Hague earlier today. The move to recapitalize banks represents an ‘about-face’ for European leaders, especially after Euro-zone officials criticized International Monetary Fund head Christine Lagarde less than a month ago for making a similar suggestion.

24-Hour Price Action

U.S._Dollar_Bounces_Back_as_an_Expanded_EFSF_Hinges_on_Slovak_Vote_body_Picture_1.png, U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak VoteU.S._Dollar_Bounces_Back_as_an_Expanded_EFSF_Hinges_on_Slovak_Vote_body_Picture_4.png, U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak Vote

Key Levels: 12:50 GMT

U.S._Dollar_Bounces_Back_as_an_Expanded_EFSF_Hinges_on_Slovak_Vote_body_Picture_7.png, U.S. Dollar Bounces Back as an Expanded EFSF Hinges on Slovak Vote

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is higher, trading at 9882.19, at the time this report was written, after opening at 9863.10. The index has traded mostly lower, with the high at 9891.36 and the low at 9842.16.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow me on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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