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EUR goes from Summit to Spain

Today marks the end of the euro area leaders summit, and statements and comments released so far are consistent with many analysts’ thoughts that the summit would yield very little in terms of policy. However, once again the gathering is been sold as a success as a compromise was reached on the timetable for establishing a Single Supervisory Mechanism.

According to Merkel, this two day EU summit was not for decisions it was about putting things on the right track. A banking supervisor role and a common budget for the Euro-zone had been the main topics of choice, but Greek financing problems and the possibility of a Spanish bailout were discussed on the sidelines.

The Germans, the Dutch and Finns voiced their opposition to certain changes, concerned about placing weaker member nations risk on the EU balance sheets. However, a banking supervisor is required to allow the promised ESM program to start pumping much needed capital directly into weaker Euro-zone banks. Germany has compromised; it is willing to give ground on the scope and size of the SSM. A framework is expected to be in place by the start of 2013 and for work to start late 2013. This is most likely a time schedule that will not be reached.

Greek problems are off track and investors fear derailment. Greek officials last evening suggested that the overdue tranche of +EUR31.5b should be paid in full and not installments and it should be paid now. This statement certainly had the risk-loving traders second-guessing some of their own positions entered earlier in the week. The IMF want the EU to reduce their debt, but euro members and ECB have too much Greek debt on their own books to currently entertain this idea. Spain, investors other periphery concern, continues to spin it own wheels, passing the ball back to the other Euro members, seeking out the technical conditions for the aid that could be offered to them before they can make a decision for financial aid. At the summit, both countries were sideline discussions, but certainly front and center issues for most investors.

Despite the mixed performance overnight in various asset classes, it was a good week for most markets. Dominating was Chinese economic data; it helped relieve concerns about the health of Asia’s largest economy. Many investors had been wondering if it was going to be a hard or soft landing for the world’s second largest economy. The rally in Spanish bonds and Chinese export data helped the EUR to push broadly higher this week as investors embraced risk. Will the EUR gains be sustainable? Yesterday afternoon’s price action goes some way’s to prove that there is only moderate demand for the single unit. With stronger demand perhaps the EUR would not have given up gains so easily.

Data this morning showed that the UK government borrowed less in September (+GBP12.8b and -700m less y/y) than it has done for that particular month going back to 2008. However, they still look on course for missing their borrowing target for the year. The lower borrowing figure reflects reduced spending by local governments and public corporations, but it does not help Chancellor Osborne to meet his borrowing targets. This will put more pressure on the Chancellor to cut spending further or admit he needs more time to fix public finances.

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This has been a tough week. Many had excluded themselves from the early risk rally at the beginning of the week to focus on the major event of the week the EU summit. The one directional risk play fuelled by Chinese data last weekend to many was an easy win. Buying the rumor sell the fact has managed to guide the EUR lower. The market is easing away from the trend line from May 2011 high (1.3144). Good profits have been booked yesterday on the single unit long trade. This week’s overbought conditions probably still need to be worked out, however, expect the markets to use dips as fresh buying opportunities first go around as the underlying bias remains with the bulls while above the 21-DMA at 1.2956.

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Other Links:
EUR Waits on Main Event [1]

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Dean Popplewell

Dean Popplewell [6]

Vice-President of Market Analysis at MarketPulse [7]
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell