Risk FX Rallies as EZ Credit Spreads Compress

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Top Stories

  • Speculation of CB to IMF deals propels EURUSD higher
  • UK PMI Services beats to upside
  • Nikkei up 0.60% Europe up 0.99%
  • Oil At $101.62/bbl
  • Gold hovers near $1750/oz.

Overnight Eco

  • AUD AiG Performance of Service Index ( NOV ) 47.4 vs. 48.4
  • AUD ANZ Job Advertisements (MoM) ( NOV ) 0.0% vs. 0.6%
  • EUR Euro-Zone Sentix Investor Confidence (DEC) -24.0 vs. -21.4
  • EUR Euro-Zone Purchasing Manager Index Services (NOV F) 47.5 vs. 47.8
  • GBP Purchasing Manager Index Services ( NOV ) 52.1 vs. 50.7

Event Risk on Tap

  • USD ISM Non-Manufacturing Composite ( NOV ) expected at 53.5
  • USD Factory Orders (OCT) expected at 0.0%

Price Action

  • USD/JPY quiet near 78.00
  • AUD/USD rallies to 1.0250 on better risk
  • GBP/USD capped at 1.5650 despite better data
  • EUR/USD rallies to 1.3450 on CB to IMF speculation

Much more constructive tone in the currency market as we start the week's trade with high beta FX rallying on speculation of possible new financing scheme for trouble EZ sovereign credit involving central banks and the IMF. A story in German newspaper Die Welt suggested that the Fed along with 17 central banks from Europe would create a lending consortium that would provide the IMF a "triple-digit billion" loan that would be used for a special fund to help finance troubled credits in the Eurozone region. US Secretary of Treasury Timothy Geithner will be in Europe this week to presumably discuss the details of such a proposal with European fiscal and monetary officials.

As we noted earlier, "It appears that authorities across both side of the Atlantic are coming to the conclusion that the central banks to IMF scheme is the most expeditious policy response to the growing credit crisis in the EZ region as it neatly sidesteps many political barriers by providing much needed capital without the need for legislative approval.

However, the central banks-to-IMF plan is rife with problems. The IMF is simply not big enough to provide sustained financing to the Eurozone and the organization's members from the developing world may object to so much aid going to the coffers of developed nations. In short, the IMF financing scheme may turn out to be yet another stop gap measure and is unlikely to pacify European credit markets for long."

Nevertheless, for now the markets are responding positively to the news with Italian BTPs especially showing great improvement at the 2 year yield dipped to 5.8% from nearly 8% just a few weeks ago. The easing of stress in the EZ credit markets should continue to underpin the EUR/USD for the time being but traders will want to see some further progress on fiscal unification as the week progresses if the rally in the pair is to remain sustainable.

Meanwhile data on the economic front continued to deteriorate with EZ Final PMI Services reading printing at 47.5 while the Sentix investor confidence data came in at -24.0 vs. -21.4 eyed. Retails Sales however printed a tad better than forecast at -0.4% versus -0.8% projected but continued to contract. It is clear that economic growth in the EZ is dangerously close to contraction as the fallout from the sovereign debt crisis takes its toll on the real economy which makes this week's series of meeting even more important as markets look to policymakers for action.

In North America today the focus turns to the ISM Non-Manufacturing report with analysts expecting a slightly better read of 53.6 versus 52.9. The data may be a bit anti-climactic coming after Friday's NFP report, but may still pack a punch in the market as it will provide traders with the latest gauge of activity in the services sector. If the data beats to the upside it should help the rally in risk extend its gains and push EUR/USD towards a test of the 1.3500 level as the day progresses.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 15:00 10:00 ISM Non-Manufacturing Composite ( NOV ) 53.5 52.9
USD 15:00 10:00 Factory Orders (OCT) 0.0% 0.3%

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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