Market Drivers October 19, 2012
EU summit makes progress on regulation but delays banking union integration
UK Public finances improve
Nikkei up 0.22% Europe -0.44%
Oil $92/bbl
Gold $1734/oz.

Europe and Asia:
JPY All Industry Activity Index 0.1% vs. 0.2%
EUR German Producer Prices 0.3% vs. 0.3%
EUR Current Account 8.8B 11.3B
GBP Public Sector Net Borrowings 10.7 vs. 11.8

North America:
USD Existing Home Sales 10:00
CAD Consumer Prices Index 8:30

Its been a very quiet night of trade in the FX market with high beta currencies essentially treading water on the last trading day of the week amidst little newsflow from the EU summit and a quiet economic calendar in both Asia and Europe. The euro drifted towards the 1.3050 level before finding some support from sovereign buyers. There is a reported 1 Billion option expiry at New York cut today at 14:00 GMT at the 1.3050 strike price which may box the pair into a tight range until that time.

Meanwhile at the EU summit European leaders continued to work on long range plans for further fiscal integration but made only modest progress on the issues. With respect to banking union the leaders decided to first establish a regulator with implementation to take place during the course of 2013. Therefore no banking union will occur until a regulator is in place leaving the region with a fractured banking sector at least until the start of 2014. Some analysts have argued that a banking union in the EZ is perhaps even more important than a fiscal union, so it will be interesting to see if this gradualist approach will be enough to satisfy the market.

As to the idea of further burden sharing and fiscal integration the leaders decided to push back the discussion to their next meeting in December. Clearly there remains serious disagreement within the EZ as to the extent of integration the members are willing to assume.

Overall the EU summit is producing little new policy initiatives so far, and that lack of action is being reflected in the market as the enthusiasm of euro longs has clearly diminished over the past few days with the pair failing to take out the 1.3150 barrier this week and now in danger of slipping back to the 1.3000 level as progress on the fiscal crisis in Europe remains slow.

On the economic front the EU current account printed lower than expected at 8.8 Billion versus 11.3 while in UK Public sector net borrowing improved to 10.7 Billion versus 11.9 Billion. The UK data showed a marked improvement is finances that showed borrowing remained capped at last year’s levels despite the slowdown in the UK economy. The news kept cable relatively well bid above the 1.6050 level and the unit improved against the euro with EURGBP trading lower by 20 points in the aftermath of the release.

In North America today only housing data on the menu with market anticipating a decline in Existing homes sales to 4.73M run rate versus 4.82M the month prior. Given the recent strength in US housing however, the data could surprise to the upside and provide some support for USDJPY which remains above the 79.00 figure after its break out a two days ago and looks constructive as long as it stays above that level.

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