Overnight trading in the forex markets changed little with traders focused on the EU leaders' summit later in the week to see whether policymakers can finally coordinate efforts on the euro zone debt crisis.Currency markets appear to be in a stalemate as traders take a wait and see before committing to a directional bias.
At this point, history has tainted traders' optimism with so many failed "comprehensive solutions" already in the books. It looks like the market will be waiting for the results of the meeting to be reported and carefully monitor the headlines for cues of the summit's progress, much as we did two months ago.
Will December's "comprehensive solutions" break the historical pattern?
The summit's "history" puts additional spotlight on the preliminary meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy, the euro zone's top two economies, will attempt to finagle a joint position ahead of the summit.
With no scheduled press conference or official reporting schedule, traders will be looking for any headlines coming from people familiar to the conversation and anything they can get their hands on to determine the sentiment of the two leaders going into the summit.
With economic data fairly quiet, euro zone headlines will be in control of the currency market, putting the main focus on the preliminary meeting and the summit. Traders are setting the bar very high for the EU in light of historical track record of failing to provide a solution.
At a minimum, the market is going to need to see:
* Detailed agreement on the stability and growth pact. We need firm numbers on allowed budget deficits and debt, as well as an enforcement plan.
* Timeline on implementation. If it takes two or three years, the market will view the summit as a failure because Greece and other countries do not have that long.
* No verbal opposition. If any euro zone country says it does not like the plan, it will be viewed as a failure.
In past summits, the market traded up on the hopes of a comprehensive solution and then disappointment sets in and the market sells off.
The likelihood the summit can accomplish what is needed for a comprehensive solution is small. Spain and Belgium are still forming new governments and the political situation in Italy and Greece is on the fragile side.
Traders are likely to see risk appetite off as the euro zone once again disappoints. A great way to play the risk off trade is selling the NZD/USD.
The New Zealand dollar is a high carry currency with a very large deficit account, making it dependent on foreign capital and likely to sell off fast with risk appetite fading.
Consider selling NZD/USD at 0.7900 or better with a target of 0.7500 and protective stop at 0.8100. Remember, we are looking for market to float up ahead of the summit on hope and sell off on the failure of a solution from EU.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.