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FOREX: Euro Sold Before EU Debt Crisis Summit as Bickering Continues

FOREX: Euro Sold Before EU Debt Crisis Summit as Bickering Continues

2011-10-21 07:05:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • Currencies Little Changed vs US Dollar, Markets Await EU Summit
  • Euro Sold as ECB’s Nowotny Talks Down ECB Role in EFSF Boost
  • German IFO Unlikely to Have Lasting Impact on FX Price Action

The major currencies yielded a mixed performance in overnight trade, with most generally flat against the US Dollar. The standstill likely reflects indecisive risk sentiment trends ahead of the weekend’s EU debt crisis summit, with investors unwilling to commit to directional bets until the outcome is revealed. On balance, the broad outlines of what is needed are well-established at this point:

  1. Acknowledgement that Greece is bust, followed by a partial default and restructuring
  2. Strong provisions to cut off contagion from Greece to the rest of the Euro Zone
  3. A plan to recapitalize banks that take heavy losses on their holdings of Greek debt
  4. A tangible commitment to ensure other EU members will not be allowed to fail

Needless to say, steps 2-4 are likely to prove most difficult as policymakers haggle over how to come up with adequate funding to assure banks are kept liquid while still having sufficient capital on hand to credibly claim a meltdown in larger Euro Zone countries like Italy and Spain will be prevented. Proposals to use leverage to amplify the firepower of the EFSF bailout fund have been met with stiff resistance, both from some EZ member countries (like Finland) as well as the European Central Bank. Indeed, the Euro is underperforming overnight after ECB councilmember Ewald Nowotny stressed that the central bank’s priority is to fulfill its mandate of price stability, not to intervene in public finances. He also mentioned policymakers discussed an interest rate cut at the ECB’s last meeting, which compounded pressure on the single currency.

On the economic data front, the German IFO Survey of business confidence headlines the docket, with expectations calling for sentiment to drop for the eighth consecutive month in October to yield the lowest outcome since June 2009. The report seems unlikely to produce lasting fireworks considering it will offer nothing particularly surprising that has not had ample opportunity to be priced into exchange rates. With that said, the probability of an ECB rate cut at November’s meeting is priced in at just 31.8 percent at present according to data compiled by Credit Suisse, so there is arguably room for traders punish the Euro further if a particularly dire outcome markets to revise their bets toward the dovish side of the spectrum.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

21:45

NZD

Net Migration s.a. (SEP)

-660.0

-

120.0 (R-)

23:01

GBP

Nationwide Consumer Confidence(SEP)

45

49

48

0:30

AUD

Import Price Index (QoQ) (3Q)

0.0%

0.5%

0.8%

0:30

AUD

Export Price Index (QoQ) (3Q)

4.0%

3.6%

6.0%

1:35

CNY

MNI Flash Business Sentiment Survey (OCT)

58.50

-

59.84

2:00

NZD

Credit Card Spending s.a. (MoM) (SEP)

1.6%

-

-1.4% (R-)

2:00

NZD

Credit Card Spending (YoY) (SEP)

5.2%

-

4.7%

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:45

EUR

French Own-Company Production Outlook (OCT)

-

4

Low

6:45

EUR

French Production Outlook Indicator (OCT)

-

-29

Low

6:45

EUR

French Business Confidence Indicator(OCT)

98

99

Low

7:00

CHF

Money Supply M3 (YoY) (SEP)

-

7.6%

Low

7:00

CHF

Real Estate Index Family Homes (3Q)

-

396.3

Low

8:00

EUR

German IFO – Expectations (OCT)

97

98

Medium

8:00

EUR

German IFO - Business Climate (OCT)

106.2

107.5

Medium

8:00

EUR

German IFO - Current Assessment (OCT)

116.5

117.9

Medium

8:30

GBP

Public Finances (PSNCR) (Pounds) (SEP)

18.0B

11.8B

Low

8:30

GBP

Public Sector Net Borrowing (Pounds) (SEP)

11.8B

13.2B

Low

8:30

GBP

PSNB ex Interventions (SEP)

15.0B

15.9B

Low

9:00

EUR

Euro-Zone Government Debt-GDP Ratio (2010)

-

85.1%

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3676

1.3863

GBPUSD

1.5713

1.5836

--- 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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