FOREX: Euro May Fall Even If EU Delivers On Debt Crisis Measures

By Ilya Spivak, Currency Strategist

Talking Points
  • Any Relief to EU Debt Crisis After Leaders’ Summit Inherently Temporary
  • Euro May Fall Despite Success in Brussels as Fundamentals Return to Focus
  • Australian Dollar Falls as Inflation Cools, Reinforcing RBA Rate Cut Bets
  • NZ Dollar Sold Ahead of RBNZ Meeting as Business Confidence Disappoints

After weeks of speculation, the culmination ofthe latest effort to remedy the EU debt crisis is finally just around the corner aspolicymakers prepare to convene in Brussels for a final push toforge a lasting solution. Officials seemed to get off to a rocky start over the weekend, producing a list of what theEU won’t do to solve the crisis rather than what it will .

Broadly speaking, policymakers have to achieveon three fronts. They must: d ramatically reduce the Greek debt burden bycajoling banks to “voluntarily” accept losses on asmuch as 60 percent of their bond holdings; c ome up with the money to recapitalize thosebanks, cutting off contagion from Greece into the rest of the EUand preventing an evaporation of liquidity that saps the alreadyfragile economy of t he credit needed to do business; and craft a mechanism for debt-strapped countries tosecure funding, thereby avoiding a replay of the Greek dramaelsewhere.

A flurry of proposals has emerged over recent days, with a dedicated swarm of pundits and prognosticators dissecting every imaginable aspect of the opaque tidbits released by anonymous “people familiar with the proceedings” to the newswires. Looking past the minutiae however, it is clear that the goal of whatever emerges after all is said and done will be – once again – to only temporarily placate the financial markets.

Indeed, the debt crisis was not born of the spending habits of Greece, Italy and company but of the inherent problem in lumping very different economies under one monetary umbrella while maintaining independent and widely divergent fiscal policies. This means that crafting a lasting solution will require cumbersome steps including augmenting the EU’s core treaties, a process that is surely not going to be complete over a weekend. This means the object of the game right now is to squash fears of an immediate meltdown, buying time to haggle over the long-term solution in the years ahead, and whatever plan is unveiled will be judged its merits to achieve just that.

Importantly, the Euro may find itself on the defensive even if the EUfinally satiates investors with a set of clear, actionable steps tostop the near-term bleeding. Indeed, the single currency hasrallied sharply since the beginning of October, adding over 5.5percent against the US Dollar amid speculation that market turmoilwas finally prodding lawmakers in the right direction. It is thennot unreasonable to suspect that whatever “solution” isto be unveiled over the coming 24 hours has been priced in already,allowing the spotlight to shift back to the ominous Euro Zonefundamentals.

On that front, the currency bloc is expected to underperform most of the G10 at least through 2013 (with the exception of Japan, the UK and Denmark, and only in 2011). This is likely to feed expectations for interest rate cuts that already call for at least one reduction coming as soon as November-December, weighing on the single currency anew.

Related: Australian Dollar Plunges on Softer CPI Data ; New ZealandDollar Drops after BusinessConfidence Report

Asia Session : What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:50

JPY

Corporate Service Price (YoY) (SEP)

-0.1%

-0.4%

-0.3% (R+)

0:00

NZD

NBNZ Activity Outlook (OCT)

26.1

-

35.4

0:00

NZD

NBNZ Business Confidence (OCT)

13.2

-

30.3

0:30

AUD

Consumer Price Index (QoQ) (3Q)

0.6%

0.6%

0.9%

0:30

AUD

Consumer Price Index (YoY) (3Q)

3.5%

3.5%

3.6%

0:30

AUD

RBA Trimmed Mean (QoQ) (3Q)

0.3%

0.6%

0.8% (R+)

0:30

AUD

RBA Trimmed Mean (YoY) (3Q)

2.3%

2.7%

2.6% (R-)

0:30

AUD

RBA Weighted Median (QoQ) (3Q)

0.3%

0.6%

0.8% (R-)

0:30

AUD

RBA Weighted Median (YoY) (3Q)

2.6%

2.7%

2.9% (R+)

E uro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:00

EUR

German Import Price Index (MoM) (SEP)

0.6%

-0.7%

Low

6:00

EUR

German Import Price Index (YoY) (SEP)

6.9%

6.6%

Low

6:45

EUR

French Business Survey Overall Demand (OCT)

-

16

Low

8:00

EUR

Italian Business Confidence (OCT)

94.0

94.5

Low

8:00

EUR

ECB Publishes Bank Lending Survey

-

-

Medium

10:00

GBP

CBI Trends Total Orders (OCT)

-7

-9

Low

10:00

GBP

CBI Trends Selling Prices (OCT)

-

13

Low

10:00

GBP

CBI Business Optimism (OCT)

-

-16

Low

16:00

EUR

EU-27 Leaders Meet for Debt Crisis Summit

-

-

High

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3851

1.3962

GBPUSD

1.5959

1.6081

--- 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
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2011/10/26/FOREX_Euro_May_Fall_Even_if_EU_Delivers_on_Debt_Crisis_Measures.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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