European Stability Plan Hinges on Slovakia

NEW YORK ( BBH FX Strategy) - The eurozone debt crisis remains in focus with Slovakia slated to be the last eurozone country to vote on the European Financial Stability Facility enhancements later today. However, a "yes" vote is not a done deal and if Slovakia do not ratify the enhancements, it is feasible that the whole deal will collapse, which would most likely lead to sharp correction in risk sentiment.

The Slovak ruling coalition remained split over a deal to broaden the EFSF, which in some part is weighing on the EUR and cut into risk-related trades like AUD, NZD and CAD that continue to pare back some of Monday's gains. As a result, European stocks are lower (snapping a four-day rally) and bunds are higher. This is also supported in part by warnings of systemic crisis from Trichet, even though demand in Italy's bill auction today was quite good, despite Friday's downgrade.

Elsewhere, Japan's current account surplus narrowed to 407.5 billion yen in August from 990.2 billion yen in July, the largest in three months, off the back of declining investment income.

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In today's session Slovakia is the wildcard but we nevertheless expect it to pass the legislation and also expect markets to be looking ahead to measures used to increase the firepower of the fund as the next hurdle ahead of the Oct. 23 meeting.

Markets also await a Troika statement on Greece sometime this afternoon. We continue to think that good news from Slovakia and Greece is likely to support the euro short-covering rally yet we would look to sell the EUR-USD between $1.365 and $1.37.

Elsewhere in Europe, UK September industrial and manufacturing reflect still sluggish growth, despite the fact that the headline production print was better than expected (0.2% month over month vs. -0.2%).

In Asia, FX and equities received a boost in part from recent news that China's domestic sovereign wealth fund, Huijin, is buying shares of the four of the largest Chinese banks. A similar announcement by Chinese officials about Huijin in September 2008 came a few months before China's stock market bottomed out, which in turn preceded a major upturn in the U.S. stock market. Chinese bank shares are up over 1% today.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.