All Eyes On Europe!

By Mike Conlon, ForexNews.com on Jul 21, 2011 01:55:21 GMT

Today’s meeting of Euro zone Finance Ministers, bankers, and power brokers is intended to produce a solution to the debt crisis that plagues not only Europe but the global economy as well. While the immediate problem is Greece, the larger and more pressing problem is how do they prevent contagion to Spain and Italy.


While there are many different proposals floating about, the bottom line is that the politically expedient needs to be cast aside in favor of a solution. Apparently France and Germany have come to an agreement in principle, with the details to be released later today. Bear in mind that even if they do come out with a resolution (which is unlikely to be complete by today), the market may not like the terms.
Here in the US, the news yesterday that we may be close to a debt ceiling deal has taken an about-face and there is so much confusion and obfuscation surrounding these talks that it is fruitless to try to forecast when or if a deal may be forthcoming.
Overnight in the UK, consumer confidence and retail sales figures came in better than expected, though lower expectations mean that it is easier to clear the hurdle. Nevertheless, this is an encouraging sign for the UK as the government austerity kicks in.
Euro zone and Chinese PMI figures came in weaker than expected, showing signs that the global economy is starting to slow. Yet the market is rebounding and has flipped from risk-aversion to risk-taking mode as optimism over the Euro debt deal is starting to increase.
In the forex market:
Aussie (AUD): The Aussie has bounced off its lows of the morning after the market took lower than expected Chinese PMI figures as a sign that Australia’s exports may decrease as demand in China slows. However, risk sentiment has picked up so the Aussie is nearing resistance at 1.08 vs. USD. (Click chart to enlarge)

Kiwi (NZD): The Kiwi reached an all-time high vs. USD at .86 as hopes of a rate hike in lieu of an expanding economy have the markets enamored with the growth story.
Loonie (CAD): The Loonie is mostly higher as risk appetite has increased and oil prices have rebounded to just below $99. Tomorrow is the release of both CPI and retail sales data which may show further economic strength which could lead to increased rate hike bets.
Euro (EUR): While PMI figures were down, the Euro is up and trading above 1.43 vs. USD as the market is hopeful that a solution for the debt crisis is coming. I wonder if this will be a case of “buy the rumor, sell the news” for the Euro today. (Click chart to enlarge)

Pound (GBP): The Pound is also higher as consumer confidence figures came in better than expected, though lower than last month’s reading, posting a 51 vs. 49. In addition, retail sales figures came in better than expected, rising .2% vs. an expectation of no change.
Swissie (CHF): The Swissie is mostly lower as demand for safe-haven asset has decreased with the risk-taking in the market. Declining trade balance figures show the effects of a stronger franc on the economy.
Dollar (USD): The Dollar is weaker across the board as risk appetite has increased due to the dual-action of the potential Euro debt resolution and the fact that the economic data here, namely initial jobless claims, continues to be weak. This means that the market could be expecting QE3 from Bernanke and the Fed.
Yen (JPY): The Yen is weaker vs. all but the Dollar and this relationship needs to be watched closely it could be a catalyst for BOJ currency intervention. Trade balance figures came in better than expected which means that Japanese exports are improving as the recovery from the natural disaster takes effect.
So the markets will continue to wait for the news out of the Euro zone meeting in Brussels today and there could be major volatility surrounding the release of their statement as the market weighs on every word.
While the markets have been flying so far this morning, I am going to exercise caution as I’m just not as positive as others. Buy the rumor, sell the news has always been a trading mantra I’ve adhered to, so it will be interesting to say what is going to happen later today.
But for now I’m content to take profits, and looking to re-establish positions as the news is released.
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