Forex Market Update

EU Summit hopes keep risk supported

Asia struggles for overall direction

Not much to report from today’s Asian session apart from traders who seem to have been caught short of risk in early trading as the Franco/German bailout deal rally peaked near-term just above 1.38 in EURUSD. Slippage took us back to 1.3725 but a rebound and steady short-squeeze brought us back above NY closing levels.
 
Data releases were second-tier with Westpac’s Australian leading index rising 0.8 percent m/m in August after an upwardly-revised 0.6 percent the previous month. The growth rate matches that last seen in December 2010 and is the third month in a row of accelerated growth. Better employment conditions, talk of rate cuts and improving consumer confidence all point to an extension of this current positive run.

the Federal Reserve's Lockhart was on the wires reiterating that the Fed was prepared for further stimulus measures if warranted, but he believed the U.S. would not slip back into recession with recent indicators quite encouraging. However, growth was still too weak to put a dent in the nation’s 9.1 percent unemployment rate and this was unlikely to change in the near-term.

Japan’s “new measures” to combat a strong JPY are apparently neither new nor really measures. A team of senior officials has been formed, but they will only oversee the implementation of earlier measures announced back in August and September which include financial assistance and support for small and mid-size businesses to venture into overseas markets, aid to encourage domestic production bases, and a programme to supply dollars to companies seeking to obtain natural resources from abroad, and to conduct overseas corporate buyouts. Needless to say the currency markets continue to ignore this item.
 
The risk appetite pendulum swung back and forth during the overnight session, eventually settling on the more positive side of things on news of a France/Germany-led proposed “comprehensive plan” to resolve the EU debt crisis, as reported by the UK’s Guardian newspaper. Initially risk was swooning as Moody’s warned on France’s AAA rating and issued a downbeat assessment of the Spanish economy (subsequently downgraded 2 notches to A1). EU data points were weak with ZEW surveys for Germany and Eurozone all softening while GBP slid on stagflation fears as CPI jumped to 5.2 percent in September (highest in three years).

On the U.S. data front, producer prices were firmer (both headline and core) while TIC data showed net inflows of $57.9 bln (from +$9.1 bln last) though China’s purchases of US Treasuries slowed. A small positive for the housing sector saw the NAHB housing index rise to 18 from 14 (highest since may 2010). Wall St shrugged off weak Goldman Sachs earnings and recouped the losses of the previous day as European news influenced. The DJIA closed up 1.58 percent, S&P up 2.04 percent and the Nasdaq +1.63 percent.