Doubts still surround EU bailout fund proposals

The EUR remained on shaky ground throughout the Asian session as repeated headlines questioning the outcome of any EFSF discussions this weekend pulled the single currency further from its 1.3868 overnight peak. The mid-morning release of a WSJ article highlighting these issues gave us the impetus to test new Asian lows before finding some support ahead of 1.37.

Again, Asian data releases were second-tier in nature with only Australia’s Q3 NAB business confidence on tap. The EU debt situation cast a cloud over local business confidence which fell to a 27-month low -4.0 with a one notch downward revision to Q2. It is worth noting, however, that the monthly data stream showed a rebound in September after a disappointing July and August giving some hope that the worst might be over.

Japan finally released details of its draft plan of measures to counter the strong JPY but, with most leaked well before publication day, the impact was negligible. As rumoured, the plan includes the launch of a combined MOF-BOJ task force to deal with the Yen rise and expanding a credit facility by Yen 2tln to Yen 10tln to help corporate M&A's and offshore resource acquisitions. The plan goes before parliament for approval on Friday.

Once again the EUR looked firm in the early part of the overnight session, only to give back those gains in the latter stages as questions arose concerning the implementation/viability/legality of the expanded EFSF bailout package. The latest Mer-kozy meeting produced nothing new (indeed Sarkozy commented that talks had stalled over methods for the EFSF) while commentaries suggested the EFSF firepower will be closer to €1 tln rather than the €2+ tln talked about yesterday. An FT article also suggested that current EU bank recapitalisation plans would entail a shortfall of about €80 bln. As a result, EURUSD stalled in its current rally after chasing stops above 1.3840.
 
GBP shrugged off dovish Bank of England minutes with a unanimous decision for further asset purchases while continued high inflation is still regarded as transitory (see Nick’s piece here). While on central banks, Norges Banks left rates unchanged (as expected) and commented that current economic activity was slightly below expectations though no deeper slowdown was expected with inflation expected to gradually rise to target levels.
 
U.S. data was mixed with headline CPI as expected at +0.3 percent m/m and +3.9 percent y/y and core CPI slightly below forecast at +01 percent m/m, +2.0 percent y/y (in contrast to Tuesday’s surprise jump in PPI). Housing data was positive for the second day in a row with housing starts surprising with a 15.0 percent m/m increase (3.3 percent expected). The Federal Reserve’s Beige Book indicated that underlying activity was little changed (though a bit firmer) from the previous month but that uneasiness about the outlook deepened. Some districts however did show some deceleration in current activity though spending was up across the country and wage pressures remained subdued.