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Euro Steady Ahead of EU Summit

Last updated 10/26/2011 5:57 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Australian CPI cooler
• EFSF chief to travel to China, no progress yet on summit talks
• Nikkei off -0.16% Europe -0.12%
• Oil at $93/bbl
• Gold 1t $1716/oz.

Overnight Eco

• AUD Consumer Prices Index (QoQ) (3Q) 0.3% vs. 0.7%
• NZD NBNZ Business Confidence (OCT) 13.2 vs. 30.3

Event Risk on Tap

• USD Durable Goods Orders (SEP) expected at -0.7%
• USD Durables Ex Transportation (SEP) expected at 0.5%
• USD New Home Sales (SEP) expected at 0.300M
• USD New Home Sales (MoM) (SEP) expected at 1.7%

Price Action

• USD/JPY remains 76.00
• AUD/USD hits 1.0350 in selloff post weak CPI
• GBP/USD just below 1.6000
• EUR/USD rangebound between 1.3925-1.3950 as traders await summit

Very muted trade in Asian and early European dealing tonight as traders awaited the resolution of the EU summit later in the global day. EUR/USD remained bid above the 1.3900 figure but was capped at 1.3950 as markets received no progress update and remained in a holding pattern ahead of the key event. 

One ray of hope for the bulls was the possibility that China and to a smaller extent Japan may provide financing to the newly expanded EFSF.  It was reported today that  the Chief Executive Officer of the European Financial Stability Facility, Klaus Regling, will travel to China on Friday and other Asian countries, thereafter The details of the trip were still being worked out suggesting that European officials are trying to reach out outside the union in order to  raise  capital to backstop the region’s shaky credit markets.

In Italy there were unconfirmed media reports that Silvio Berlusconi may resign his Prime Ministership by the end of the year as his coalition begins to fray over the fiscal reforms required by EU. Given Mr. Berlusconi’s polarizing presence his departure will most likely be viewed as a positive move by the market, but there is little actual indication that he intends to leave. Meanwhile the country’s credit markets remained under stress with auction on 1 year Tesoro producing a yield of 4.63% up from 4.51% the period prior. This was the highest yield in more than three years since the time of the global crisis and augurs badly for more than 9B EUR more of Italian paper due to auction by the end of this week.

If tonight’s EU summit fails to pacify the markets the stress in the EZ credit markets could escalate significantly with focus now  turned fully on Italy which becomes the next point of vulnerability for the region.  As we’ve noted many times in the past, Italy cannot sustain interest rates above 6% for any extended period of time given the country’s massive debt burden and its debt service obligations. Therefore despite the seeming calm in the markets the situation could quickly degenerate into panic if EU officials are unable to restore investor confidence.

With no economic data on the EU calendar, the only release worth of note was the Australian CPI  report which printed much cooler than expected at 0.3% versus 0.7% eyed. The sharp decline in the trimmed mean readings was partly due to a new seasonal adjustment methodology used by the Australian Bureau of Statistics that lowered the weight of loan and deposit facilities and increased the weight of computer equipment.  Overall the muted inflation  data allows the RBA the freedom to lower rates should it choose to do so, but so far the central bank has remained steadfastly neutral giving no indication that it sees a need to ease monetary policy just yet. Nevertheless, the possibility of a rate cut weighed on the Aussie for most of Asian session trade as the pair drifted near the session lows of 1.0370 in the aftermath of the dovish data. 

In North America today the calendar carries Durable Goods and New Home Sales data, both of which are expected to show small improvement form the period prior but the markets are likely to focus on earnings and any news from Europe.  The EUR/USD remains eager to run the 1.4000 level on any positive news out of Brussels but is in danger of a severe selloff if the summit disappoints.        

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.