NEW YORK ( BBH FX Strategy) -- Global stock markets continue to surge after news that European policy makers had forged an agreement at the emergency summit. While we expect this is unlikely to resolve all fundamental challenges that plaque the euro zone, the outcome of the summit is likely to have satisfied market expectations.As a result, EZ spreads have come in sharply, European banking shares are 7% higher and the dollar is softer across the board.
In the near-term, we do see this plan as broadly positive for risk appetite and coupled with the recent upsides surprises in U.S. data and the potential for more accommodative policy from China, this could see growth sensitive currencies (CAD, AUD, NZD, SEK, NOK) extend their recent rally, even though we expect that the risks to the euro from here are to the downside. At the same time if today's third-quarter U.S. GDP report delivers a strong result it has a chance of taking the S&P and risk sensitive currencies with it. AUD in particular should thrive on this news despite the potential for a rate cut, given the market has already discounted nearly four 25-basis-point rate cuts from the Reserve Bank of Australia over the next year.