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Euro Finds Bids on Rumored EFSF Developments

Euro Finds Bids on Rumored EFSF Developments

2011-10-20 10:05:00
Christopher Vecchio, CFA, Sr. Currency Strategist

THE TAKEAWAY: [EFSF Will Be Able to Buy Bonds on Secondary Market] > [Calm Debt Markets] > [EURUSD Bullish]

After risk-appetite faded throughout Asian trading, higher yielding and risk-correlated assets, in particular the German bourse, the Australian Dollar and the Euro, were finding support during early European trading, floating higher on lower volume across European equity markets. The shift back to risk-appetite gained steam just before 09:30 GMT after Reuters released a report citing a document outlining the possible expanded capabilities of the European Financial Stability Fund.

According to the Reuters report, the EFSF would be able to buy bonds on the secondary market if a given Euro-zone country has no bank solvency problems and has good borrowing costs, historically. The European Commission and European Central Bank would then prepare an agreement with the Euro-zone country in 1 to 2 days, specifying how long the secondary market purchases would take. Finally, after buying bonds on the secondary market, the EFSF would have the ability to sell them back on the market, hold them to maturity, sell them back to the issuing sovereign, or use for repo.

EUR/USD 1-minute Chart: October 20, 2011

Euro_Finds_Bids_on_Rumored_EFSF_Developments_body_Picture_1.png, Euro Finds Bids on Rumored EFSF Developments

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Following the report, which had not been substantiated by any other news outlets at the time this report was written, the U.S. Dollar was sold off across the board and quickly became the worst performing currency across the majors midway through European trading. The AUD/USD and EUR/USD jumped nearly 70-pips each on the news before pulling back slightly, while European equity markets nearly took back all of the session’s losses. Similarly, U.S. equity market futures pushed further into the black, poised to open nearly 0.5 percent higher.

--- Written by Christopher Vecchio, Currency Analyst

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

Follow me on Twitter at @CVecchioFX

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