By Christopher Vecchio, Junior Currency Analyst THE TAKEAWAY : [EU Leaders Release Details on Restoring Confidence] > [Instills Hope for Minimum Collateral Damage Stemming from Greek Default] > [ EURUSD Bullish ] Markets were placed in a dicey situation earlier in the trading day in New York after it was leaked that Euro-zone leaders had yet to reach an agreement on how to handle a Greek default. Risk-appetite was steadily tailing off after European markets closed, and the major currencies were contained in tight 25-pip ranges versus the U.S. Dollar in anticipation of the scheduled 20:00 GMT news conference in Brussels by various Euro-zone leaders. EUR/USD 5-minute Chart: October 26, 2011 Charts createdusing Strategy Trader – Prepared byChristopher Vecchio Higher yielding and risk-correlated assets, including the Australian Dollar and Euro, were bid higher after Euro-zone leaders released a joint statement highlighting the progress made during meetings that occurred that past few days. The EUR/USD jumped nearly 100-pips after the statement was released, while U.S. equity markets surged back towards daily highs. The statement noted some following key points that need to be addressed “urgently”:
- The need to ensure the medium-term funding of banks, in order to avoid a credit crunch and to safeguard the flow of credit to the real economy, and to coordinate measures to achieve this.
- The need to enhance the quality and quantity of capital of banks to withstand shocks and to demonstrate this enhancement in a reliable and harmonized way.
- A simple repetition of the 2008 experience with full national discretion in the setting-up of liquidity schemes may not provide a satisfactory solution under current market conditions.
- There is broad agreement on requiring a significantly higher capital ratio of 9 percent of the highest quality capital and after accounting for market valuation of sovereign debt exposures, both as of 30 September 2011, to create a temporary buffer, which is justified by the exceptional circumstances.
- This quantitative capital target will have to be attained by 30 June 2012, based on plans agreed with national supervisors and coordinated by EBA. This prudent valuation would not affect the relevant financial reporting rules.