FOREX: US Dollar Sold As EU Summit Outcome Boosts Market Confidence

By Ilya Spivak, Currency Strategist

Talking Points
  • EU Summit Delivers Broadly as Advertised but Many Specifics Still Undecided
  • Japanese Yen Falls as Bank of Japan Expands QE Measures by ¥10 Trillion
  • All Eyes Now on US GDP Data as Global Growth Outlook Returns to Focus

After much speculation and feverishnegotiations that dragged long into the night, European Union leaders finally unveiled the details of a yetanother “comprehensive” plan to contain the sovereigndebt crisis plaguing the regional bloc since late 2009. Near-termmeasures amounted to three broad initiatives:

1 Greece will reduce its public debt to 120 percent ofGDP by 2020, with private investors agreeing to a voluntary bondswap that will wipe away 50 percent of the country’sobligations. Euro Zone member states will contribute up to€30 billion in additional capital while the “officialsector” – presumably the EU – will provideadditional financing up to €100 billion, for a total of€130 billion in new aid. Details of the new program are to beestablished by the end of the year and the bond swap initiated byearly 2012.

2 – The European FinancialStability Facility (EFSF) will be leveraged by up to 4-5 times for atotal lending capacity of €1-1.4 trillion through primarilytwo approaches: Euro Zone member states will offer insurance tobuyers of bonds of debt-strapped countries, reducing risk premiumsand funding costs; a Special Purpose Vehicle (SPV) fund will beestablished to funnel money from private and public investors– notably sovereign wealth funds of countries such as China– toward the purchase of ailing countries’ debt.Further EFSF enhancement will be sought through cooperation withthe IMF.

3 – To help reinforce the structural integrityof EU banks , lenders will be required to meet a capitalreserve requirement of 9 percent, equivalent to €106 billion,to be attained by the end of June 2012. National regulators and theEuropean Banking Authority (EBA) are to ensure that the process isnot so rapid as to result in mass bank asset sales and a scarcityof credit in the real economy. Banks are to increase capital ontheir own, turning to national governments and the EFSF as a lastresort, in that order. Lenders will also be subject to bonus anddividend restrictions until their reserve requirements aremet.

The US Dollar traded broadly lower following theannouncement, down as much as 0.7 percent against its sentiment-linked counterparts. S&P 500 stockindex futures are pointing aggressively higher in lateovernight trade, promising more of the same in European hours. Thegreenback’s decline against the Euro has been conspicuously modest however, hintingthe single currency may find itself under pressure as the fundamentals of growth and interest rates return to the forefront . The Japanese Yen likewise sold off after the Bank of Japan expanded monetary stimulus by a cumulative¥10 trillion, splitting the sum between its asset-purchasefund and credit program. The credit-load program was left unchangedat ¥35 trillion.

On the data front, all eyes are now on thethird-quarter US Gross DomesticProduct report. Expectations call for output to rise 2.5percent in the three months through September, marking thestrongest performance in a year. The outcome would confirm that theUS recovery is gathering steam, warding off fears of adouble-recession. Importantly, it is unclear whether the outcomewill prove supportive for risk appetite in terms of improving theoutlook for global growth or detrimental in that stronger USperformance undermines the case for additional quantitative easing(so-called “QE3”). The preliminary set ofOctober’s German Consumer PriceIndex figures is also on tap, with the annualinflation rate set to hold steady from the previous month at 2.6percent.

Related: New Zealand Dollar Puts in for a Cautious Climb after the RBNZ Holds

Asia Session : What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

20:00

NZD

Reserve Bank of New Zealand Rate Decision

2.50%

2.50%

2.50%

21:45

NZD

Trade Balance (NZ$) (SEP)

-751M

-440M

-697M (R-)

21:45

NZD

Exports (NZ$) (SEP)

3.44B

3.51B

3.42B (R-)

21:45

NZD

Imports (NZ$) (SEP)

4.19B

3.90B

4.12B (R+)

21:45

NZD

Trade Balance YTD (NZ$) (SEP)

724M

1065M

1020M (R-)

23:50

JPY

Retail Trade (YoY) (SEP)

-1.2%

-0.1%

-2.6%

23:50

JPY

Retail Trade s.a. (MoM) (SEP)

-1.5%

-0.5%

-1.7%

23:50

JPY

Large Retailers' Sales (SEP)

-3.6%

-2.5%

-2.6%

2:00

CNY

Industrial Profits YTD (YoY) (SEP)

27.0%

-

28.2%

4:31

JPY

Bank of Japan Interest Rate Decision

0.10%

0.10%

0.10%

E uro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

-

EUR

German Consumer Price Index (MoM) (OCT P)

0.1%

0.1%

Medium

-

EUR

German Consumer Price Index (YoY) (OCT P)

2.6%

2.6%

High

-

EUR

German CPI - EU Harmonized (MoM) (OCT P)

0.0%

0.2%

Medium

-

EUR

German CPI - EU Harmonized (YoY) (OCT P)

2.8%

2.9%

High

8:00

EUR

Euro-Zone M3 s.a. (3M) (SEP)

2.6%

2.3%

Low

8:00

EUR

Euro-Zone M3 s.a. (YoY) (SEP)

2.8%

2.8%

Low

9:00

EUR

Euro-Zone Business Climate Indicator (OCT)

-0.2

-0.06

Medium

9:00

EUR

Euro-Zone Consumer Confidence (OCT F)

-19.9

-19.9

Low

9:00

EUR

Euro-Zone Economic Confidence (OCT)

93.8

95

Low

9:00

EUR

Euro-Zone Industrial Confidence (OCT)

-7

-5.9

Low

9:00

EUR

Euro-Zone Services Confidence (OCT)

-1

0

Low

10:00

GBP

CBI Reported Sales (OCT)

-16

-15

Medium

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3812

1.4069

GBPUSD

1.5896

1.6120

--- 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/2011/10/27/FOREX_US_Dollar_Sold_as_EU_Summit_Outcome_Boosts_Market_Confidence.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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