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Commodity Currencies Lead Majors as Merkel and Sarkozy Reach Agreement

Commodity Currencies Lead Majors as Merkel and Sarkozy Reach Agreement

2011-12-05 14:50:00
Christopher Vecchio, CFA, Sr. Currency Strategist

Fundamental Headlines

Merkel, Sarkozy Meeting to Prepare for Brussels – Bloomberg

Euro-zone Economy Heading for Steep Contraction in Q4: PMIs – Reuters

Greek Haircut was a “Terrible Mistake”: ECB’s Orphanides – Reuters

Federal Reserve Prepares to Make Itself Perfectly Clear – WSJ

Italy Plan Opens Pivotal Week for Euro – WSJ

European Session Summary

After gapping open higher for the second consecutive week, markets were once again in risk-averse mode throughout the Asian trading session. Like the trend that has been established the past week, as London session liquidity flooded the market, risk-appetite took a turn higher, boosting the commodity currencies headed into North American trading. None of the data from the past few days was supportive of this; in fact, a slowdown in China necessitating the first rate cut in three years by the People’s Bank of China may be the silver lining to recent figures.

As markets enter perhaps the most important week of the entire year, it is clear that market participants are nervous. Headline trading is back, and exceptional volatility in the coming days is expected to follow. With five rate decisions on tap, as well as numerous growth figures due from the world’s most advanced economies, the joint press conference scheduled for this morning by French President Nicolas Sarkozy and German Chancellor Angela Merkel was to offer a glimpse as to what to expect in terms of direction in the coming days.

AUD/USD 5-minute Chart: December 5, 2011

Commodity_Currencies_Lead_Majors_as_Merkel_and_Sarkozy_Reach_Agreement_body_Picture_1.png, Commodity Currencies Lead Majors as Merkel and Sarkozy Reach Agreement

Charts created using Strategy Trader– Prepared by Christopher Vecchio

As North American trading opened, Sarkozy noted that a Franco-German accord was “very complete,” with his rhetoric indicating that the core Euro-zone was indeed seeking a new treaty to ensure the survival of the common market. He also noted that the treaty changes, such as automatic sanctions on deficits over 3 percent, would be limited to the 17 nations that use the Euro. On the other side of the podium, Merkel noted that the permanent bailout facility employed in the Euro-zone would mirror that methods used by the International Monetary Fund. She did say that the functionality and reach of the European Financial Stability Facility were unknown at present time, however. Overall, the most important news were that Eurobonds and a more involved European Central Bank were ruled out; it appears Germany has gotten its way.

In what was a seemingly confusing bit of commentary – accord had been reached but the methods that market participants believe would solve the crisis are not being put forth – risk-appetite continued to push higher, with the Australian Dollar continuing to lead the majors. The U.S. Dollar was the worst performing currency on the day, down approximately 0.5 percent across the board, as the commodity currencies pushed back towards their monthly highs. With the RBA rate decision on tap for Tuesday, the Aussie is expected to consolidate, barring more unscheduled event risk that would drive sporadic price action.

24-Hour Price Action

Commodity_Currencies_Lead_Majors_as_Merkel_and_Sarkozy_Reach_Agreement_body_Picture_4.png, Commodity Currencies Lead Majors as Merkel and Sarkozy Reach AgreementCommodity_Currencies_Lead_Majors_as_Merkel_and_Sarkozy_Reach_Agreement_body_Picture_10.png, Commodity Currencies Lead Majors as Merkel and Sarkozy Reach Agreement

Key Levels: 14:25 GMT

Commodity_Currencies_Lead_Majors_as_Merkel_and_Sarkozy_Reach_Agreement_body_Picture_7.png, Commodity Currencies Lead Majors as Merkel and Sarkozy Reach Agreement

Thus far, on Friday, the Dow Jones FXCM Dollar Index is lower, trading at 9847.29, at the time this report was written, after opening at 9872.83. The index has traded mostly lower, with the high at 9896.60 and the low at 9839.11.

--- Written by Christopher Vecchio, Currency Analyst

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

Follow him 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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