Deal Done – But Is It Enough For EURUSD?

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Market Drivers June 29th, 2012
EU Summit leaders reach concrete agreements on bank recapitalization and supervision sparking a rally
German Retail sales slide, french a bit better
Nikkei up 1.50% Europe up 2.31%
Oil at $79.50/bbl
Gold $1570/bbl

Asia and Europe:
AUD Private Sector Credit 0.5% vs. 0.5%
JPY Jobless Rate (May) 4.4% vs. 4.6%
JPY Household Spending (May) 4.0% vs. 2.5%
JPY National CPI (May) -0.1% vs .0.1%
NZD Building Permits -7.1% vs. -7.6%
CHF KOF Swiss Leading Indicator (June) 3:00
GBP Index of Services (MoM) (Apr)0.0% vs. 0.3%

North America:
USD Personal Consumption Expenditure Core (May) 8:30
USD Personal Spending (May) 8:30
USD Personal Income (May) 8:30
USD UMich Confidence (June F) 9:55
CAD GDP 8:30
CAD Industrial Product Price 8:30
CAD Raw Material Price Index 8:30

After days of discord and confrontational rhetoric EZ officials were able to come to a partial agreement on concrete policy initiatives to combat the credit crisis in the region surprising the markets and sparking a rally in risk FX in Asian and early European trade today. Members agreed to recapitalize the banks directly via ESM while making the ECB the central banking supervisor for the region.

Policymakers at the EU summit also agreed that the EFSF funds will not be senior to Spanish sovereign debt, that the bailout conditions will be relaxed without the absolute need for Troika overnight and that the roadmap for further integration will be laid out at the next summit in October. The immediate impact of those decisions was felt in the EU credit markets with Spanish long term bonds falling by -49bps while Italian bonds declined -39bps with the short end of the curve falling even more. The news should prove to be relief to Southern European economies which were facing crisis funding conditions ahead of the summit.

In short the EU leaders took short term action to stabilize the crisis in the EZ banking sector by allowing for direct recapitalization of the troubled banks, but set aside any meaningful reforms on mutualization of debt and further fiscal integration of the union. As result, the markets expressed only guarded optimism regarding the outcome of the summit with the rally in risk stalling throughout most of the morning European session.

Nevertheless, given the highly negative sentiment and low expectations that preceded the summit, today’s events must be viewed as progress and should help to stabilize the credit markets in the near term, assuming officials quickly implement those measures and actually infuse the financial system with much needed capital. Still, skepticism remains both with respect to the execution of these bailout plans and the prospect of growth in the EZ which explains why the reaction in European trade has been so muted.

We’ll have to see if the rally picks up in North American trade which will likely depend on the reaction of US equities to the EU accord. The eco calendar is relatively quiet with only Personal income/spending and Chicago PMI on the docket. If the data can surprise to the upside it could prove supportive to risk and help fuel the rally as we move into the weekend. For now the Asian session spike high of 1.2625 remains a key level of resistance for the longs but if it is taken out the euro could make a run towards the 1.2700 figure as further short covering kicks in.

Boris Schlossberg
Managing Director

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