As indicated in our previous update that the meeting between French
President Sarkozy and German Chancellor Merkel will not be able to
provide any credible solution to the escalating debt crisis in the
region and nothing solid will be agreed between the two counties, the
summit did disappoint the markets. Euro was hurt by the lack of progress
over a common Eurobond, the announcement stated that a joint euro bonds
may be a longer term option. The two leaders also failed to address the
underlying problem of debts in the individual countries and the banking
issues. The single currency retreated from the day's high of 1.4473
after the joint conference as French and German leaders rejected the
proposed Eurobond plan as well as an expansion of the 440 billion euro
rescue fund (EFSF) to stop the region's debt crisis. Many analysts and
economists suggest the only way to settle the financial instability in
the eurozone especially with the peripheral countries would be for the
eurozone to issue joint euro bonds. Euro slipped back below yesterday's
low of 1.4355 this morning, however, decent demand continued to appear
around mid 1.43 level and more bids from European names are reported at
1.4300.
Once again the Swiss franc was the biggest mover among other major
currencies, after rebounding yesterday in New York session on rumors of
SNB checking rates in forward market, Swissy edged higher again ahead of
the meeting between Switzerland's government and SNB later today to
discuss the franc. Traders are speculating the Swiss authorities may
come up with some new measures to curb franc's strength. Swiss franc
fell across the board, with USD/CHF and EUR/CHF breaking above the level
0.8000 and 1.1500 respectively. Although there has been talk that the
SNB will set a temporary peg of the EUR/CHF for some time, rumors
circulating that the SNB may set a more aggressive target for the
EUR/CHF at a rate higher than previously rumored 1.10 level (rumors
including 1.15, 1.20 and 1.25). Having said that, there are still
traders and analysts are skeptical of a peg between euro and the Swiss
franc, they believe measures like capital controls over money inflows
and negative rates for offshore deposits are more likely scenario. If
the Swiss authorities do disappoint the market, the Swiss franc may
surge against both euro and dollar which may indirectly hurt the single
currency as strength in EUR/CHF has been supporting the euro recently
even with the soft GDP data in eurozone.
The British pound continued to move higher yesterday on
higher-than-expected CPI and suggestions from BOE Governor King that UK
inflation may reach 5%, sterling somehow benefited from retreat in euro
and cable retested this month's high formed on 8 Aug at 1.6478.
Cross-buying due to risk appetite on rebounding equities also seen
supporting the sterling, however, cable started retreating since
overnight trade in New York as traders booked profit ahead of the
release of Bank of England MPC meeting minutes and UK employment data
all scheduled at 08:30GMT. BOE minutes should be the key, analysts are
expecting at least one of the hawks (Spencer Dale and Martin Weale) may
deflect and voted for no change which make the votes count at 8-1, if a
vote of 9-0 is released, this may put pressure on sterling.
Elsewhere, the release of better-than-expected Australian data, Q2
wage price index and June Wespac leading index lifted aussie and fund
buying was seen this morning, pushing AUD/USD higher to session high of
1.0497 and mixture of stops and offers in the region of 1.0500-20 is in
focus, next batch of stops is located at 1.0550.
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