This Country's Banks Could Offer Europe's "Best Place to Hide" from the Euro Crisis

Nordic banks may offer investors the best protection against a recapitalization wave that threatens to dilute the share values of Europe's lenders, said UBS AG. (UBSN)

"It is a very attractive place for European investors to hide from the ongoing eurozone problems," Nick Davey, a London-based analyst at UBS, said in an interview.

Scandinavian banks, including Nordea Bank AB (NDA) and DnB NOR ASA (DNBNOR), have negligible holdings of bonds sold by Europe's most indebted nations and are better capitalized than most of their European peers. Nordea Chief Executive Officer Christian Clausen said this week his bank has no plans to sell shares. At the same time, Nordic governments have some of Europe's smallest budget deficits. Norway has the biggest budget surplus of any AAA rated nation, offering an extra layer of protection to investors.

Shares in DnB NOR rose 3.2 percent to trade at 62.95 kroner as of 10:59 a.m. in Oslo, outperforming the 46-member Bloomberg index of European financials, which gained 1.9 percent. Nordea rose as much as 1.8 percent, before trading 0.6 percent higher in Stockholm.

In Norway, "the banking industry has a good solvency position, satisfactory profitability and low loan losses," the head of the country's financial regulator, Morten Baltzersen, said in an interview. "These factors provide a good starting point to meet potential challenges."

'No Immediate Need'

Swedish Finance Minister Anders Borg said Oct. 18 he sees "no immediate need" for the country's banks to raise their capital buffers.

The European Union may require banks in the region to increase core capital ratios to 9 percent of their risk-weighted assets, according to a person with knowledge of the plans. The deadline for meeting the increased capital levels may be the middle of next year, German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee this week, according to two lawmakers who attended the meeting. That's almost seven years ahead of the target set by the Basel Committee on Banking Supervision.

Nordea, the biggest Nordic lender, had a core Tier 1 capital ratio – a measure of financial strength – of 9.2 percent in the third quarter. DnB NOR had a capital adequacy ratio of 11.7 percent at the end of the second quarter, the most recent reported figures show.

Sidestepping EU

Nordea passed the European Banking Authority's July stress tests with a 9.5 percent capital ratio, almost twice the minimum requirement of 5 percent. DnB NOR passed with a 9 percent ratio. Another round of exams would help European leaders identify capital needs.

Sweden's lenders need to maintain higher capital levels than their foreign peers because the country's bank industry is four times the size of the economy, Financial markets Minister Peter Norman said in Stockholm today.

The country is also ready to sidestep European Union efforts to impose caps on capital buffers beyond minimum ratios set by the Basel Committee on Banking Supervision, said Lars Frisell, chief economist at the Financial Supervisory Authority.

Sweden "will of course use pillar 2," which focuses on risk management, to enforce higher capital requirements for its banks if the country is unable to do so under pillar 1, Frisell, who is also a member of the Basel Committee, said at an event in Stockholm today.

Tapping Debt Markets

Nordic banks are among the few in Europe still able to tap wholesale funding markets. Two Swedish lenders issued senior unsecured notes last week; SEB AB sold 750 million euros ($1.03 billion) in floating rate notes due in 2013, while Svenska Handelsbanken AB (SHBA) sold 1.25 billion euros in notes due in 2021.

"That sends a pretty clear message to the market: we are amongst the few funding safe havens still left standing in the European banking index," Davey said.

Besides Nordic lenders, Germany's Deutsche Bank AG and Commerzbank AG (CBK) have sold unsecured debt since September, as have London-based HSBC Holdings Plc (HSBA) and Rabobank International of the Netherlands.

Banks in Norway and Sweden "have very little that they need to demonstrate in this round of stress tests," Davey said. "Capital ratios already have extremely thick buffers above this required hurdle rate and they simply don't have a lot of exposure to volatility to sovereign debt prices."

Raising Capital

Europe's banks may need to raise 150 billion euros ($205 billion) to 230 billion euros to meet additional capital requirements, Kian Abouhossein, a JPMorgan Chase & Co. analyst in London, wrote in an Oct. 1 note.

The EBA estimates Europe's banks need to an additional 70 billion euros to 90 billion euros in capital, the Financial Times reported yesterday, citing people familiar with the talks.

Nordea has "no direct exposure" to bonds sold by Portugal, Italy, Ireland, Greece or Spain, it said on Oct. 19. Norway's six largest banks hold less than 1.3 percent of their managed capital in assets from those countries, the financial regulator said in June.

Norway, which channels most of its oil income into a $530 billion sovereign-wealth fund, has been shielded from the worst of the euro area's debt crisis, helping keep unemployment below 3 percent, Europe's lowest rate. This has allowed banks such as DnB NOR, the country's biggest, to benefit from lower risk premiums than the rest of Europe, the Financial Supervisory Authority said last month.

No Crisis

"The Norwegian banking industry is clearly not in a state of crisis," Baltzersen said.

Lenders including Deutsche Bank AG (DBK) have said they oppose recapitalization because it would dilute existing shareholders without addressing the risk of sovereign debt defaults. BNP Paribas SA and other banks have said they can meet increased capital requirements without cash injections.

Concerns over a potential default by Greece and contagion in other debt-ridden nations have pushed the 46-member Bloomberg Europe Banks and Financial Services Index down 31 percent this year. DnB has lost 23 percent and Nordea has dropped 24 percent.

Norwegian banks' "situation is quite solid, especially in relative terms compared to an average European bank," Oeystein Olsen, the governor of the central bank of Norway, said in an interview this week.

"The further down the road we get the more the Norwegian sovereign wealth looks like an attractive backdrop in which to operate," Davey said.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net.

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net.

Q4 FX Outlook: USD Rally to Extend

Waiting for a US dollar rally this year has felt like Waiting for Godot at times as we anticipated one for a long time before the greenback finally rallied sharply in late August and early September after a long period of stagnation over the summer, despite a number of market developments that have normally proven positive for the currency in the past. Those included falling equity markets, rising signs of worry in other risk indicators and in global growth concerns, particularly in Asia and emerging markets.

In our Q3 FX outlook, we discussed the “ugly horse-race” among the G-10 currencies because we felt that few if any of the major or minor developed economies would offer compelling reasons to buy their currencies and that it would be a question of which currencies appeared the least hobbled by fundamentals. The basic outlines of such a development have come to pass, though the USD was very slow to begin rallying as economic data out of the U.S. was terrible as well. But, the relative slowing in other economies and thus a tightening in interest rate spreads was indeed a positive driver for the eventual USD rally. And because U.S. rates were already so low, the tightening has even occurred despite Federal Reserve Chairman Ben Bernanke’s promise to keep the monetary pedal to the metal on low rates until at least mid 2013 – and despite hints that QE3 in some shape or form is on the way. To take the most pronounced example of falling yield spreads, the highest yielding currency among the G-10, the Australian dollar (overnight rate at 4.75 percent as of mid-September) saw its 2-year government bond yields drop from 4.75 percent at the beginning of Q3 to about 3.50 percent by mid-September, a 125-bp drop as compared with a drop in US 2-year rates of a mere 25 bps or so in the same time frame.

We suspect a further tightening in yield spreads between the USD and other currencies will continue to unwind the carry advantage built up against the USD last year and at the beginning of 2011 as economies around the world, particularly in Europe and to some degree in Asia and in developing markets, stumble through a soft patch in growth or worse. At the same time, yet another round of government stimulus and Fed QE could see a few quarters of solid GDP performance as US politicians pull out all the stops to get the economy going and then jostle to take credit for it ahead of the presidential election next November. Efforts in this direction will be aided by the long period of dollar weakness, which has made the U.S. extremely competitive for sourcing production and services and attractive for investment.

Chart: US 2-year yields vs. average G-10 currency yield. In the chart above we have plotted the spread of the 2-year swap rates for the USD vs. an average of the 2-year swap rates for the remainder of the G10 currencies. We’ve then compared this with the USD’s performance vs. an evenly weighted basket of the remainder of the G10 currencies. It is clear that from a yield perspective, owning the USD is far less unattractive than it was just a few months ago. It is also clear from the chart above that the USD has been slow to respond to this development.

There are two further potential sources of USD strength – one is the likely return of the Homeland Investment Act (HIA), the original version of which allowed U.S. companies to repatriate profits tax free back in 2005. Q4 would appear to be the most likely timeframe to discuss and enact an HIA2, which would then go into effect in the New Year. Estimates of the amounts that might be repatriated this time around are far higher than the original HIA and could reach far over half a trillion dollars.

The other potential source of strength for the USD is that there is simply no alternative in a deleveraging world going where participants are unwinding their previous bets on “everything up versus the USD”. The lack of credibility of the Euro as the single currency faces an existential crisis now and in the coming few quarters will also continue to delay the demise of the USD’s status as the world’s reserve currency. Of course, these developments will not boost the U.S. currency forever and we wonder how long it will be until the long run accumulation of the twin U.S. deficits eventually returns to haunt the U.S. debt market and its currency.

Europe - crunch time
As we discuss in our introductory article to this publication, it is crunch time for the European Union, as the efforts of the European Central Bank and EU politicians have failed to outrun the galloping problems caused by the awkward framework of a single currency and 17 finance ministries and 17 sovereign bond markets. As we are leaving Q3, the situation is fast reaching the ultimate crossroads: either the EU makes a strong show of solidarity or a solution will quickly be forced upon it by the markets. 
The Euro could see a relief rally if the EU manages to muddle through with the solidarity enforced by the market’s discipline, but a longer term solution to European debt woes would likely involve some form of QE by the ECB to keep bond markets orderly and dig European banks out of their liquidity pinch. And if the USD has been so punished for the Fed’s various rounds of QE, why shouldn’t a similarly dim view be taken of the Euro for also engaging in money printing? Of course, the immediate relief that sovereign debt investments won’t go immediately bad could offset some of the deleterious effects of a European version of QE (save for Greece, where a severe haircut or Greek exit is a question of time). And a more stable sovereign debt and financial services environment could see the Euro rewarded for its deep liquidity versus higher beta, more pro-cyclical currencies as global growth possibly hits a soft patch over the next couple of quarters.

The Scandies - safe havens?
There was a flurry of talk about the potential for NOK and SEK to become safe haven currencies in the wake of the Swiss National Bank’s frantic and so far successful efforts to put a floor in EURCHF at 1.20. Immediately in the wake of the SNB’s announcement in early September, the market drove both NOK and SEK sharply stronger, completely out of proportion to any other development that could have explained the situation besides the idea of safe haven seeking (or reversals based on positioning?). Afterwards, however, the strengthening in these currencies was erased. So are they potential safe havens or not? There are two important features a currency must have in order to be considered a safe haven in today’s environment – a superior sovereign balance sheet and deep liquidity. CHF used to be the best option until the franc’s incredible strength made the SNB and Swiss government “go nuclear” in their intervention. Sweden has a very solid balance sheet and Norway has an impeccable one, but both SEK and NOK fail the liquidity requirement for a true safe haven. Also, SEK is traditionally a pro-cyclical currency due to its economy’s dependence on export markets. NOK is similarly dependent on oil exports, though it tries to sterilise oil revenues with its pension fund. Of the two, NOK would appear a safer harbour than many of the rest of the G-10 currencies, but it would be surprising to see performance similar to the Swiss franc’s (where the oversized Swiss financial industry was an additional contributor to the franc’s aggravated rise).

The Antipodeans: still waiting for the fall
Last time around we asked whether the strength in the Aussie and Kiwi versus the rest of the market was a bit overdone. Both currencies have begun to trade a bit more sideways in Q3, including one particularly sharp sell-off as equities slid off a cliff in early August. The kiwi has been the stronger of the two due to a few months of perkier economic data and the belief that the Reserve Bank of New Zealand might unwind the emergency rate cut taken in the wake of the earthquake earlier this year. But both rather extremely overvalued – particularly the Aussie, given present market circumstances and our expected scenario for Q4. Because Australia has the highest policy rate among the G10 currencies, it also will likely have the highest beta to risk as the Reserve Bank of Australia has more potential for policy accommodation. The housing bubble appears to be in near full deflation phase now Down Under and could cause a considerable pinch in the Australian banking sector, suggesting that eventually even the RBA has to get in on the Maximum Intervention game in the quarters to come.

Chart: AUD and NZD against the rest of the G-10. Aussie and kiwi rose to new multi-year highs against the rest of the major currencies during 2011 and were remarkably resilient despite the heavy sell-off in risk and weakening emerging market currencies. Just before publishing time, however, they suffered a setback in the wake of the FOMC meeting, which may serve as a catalyst that pushes them lower to a fairer value, given the darkening clouds in the global economic outlook and their normal pro-cyclical correlation.

G-10: the bottom lines

USD: A lack of alternatives and Maximum Intervention gone global will make the USD continue to look less unattractive in Q4 and the currency has been so weak for so long that the U.S. economy could reap some of the benefit.
EUR: It is crunch time for the Eurozone, which will need to pull together or face a further – and this time more urgent – existential challenge. Will Germany step up to foot the bill for the periphery?
JPY: The government bond rally and declining interest rate spreads (the carry in the carry trade) are the only real supports, as the domestic Japanese economy is relatively moribund. If bond markets pivot some day, so will the JPY, until then, it could remain strong for a while yet.
GBP: Sterling shows us the degree to which the Euro’s woes are driven by its untenable political and central bank framework rather than by the absolute magnitude of its sovereign debt as the UK debt load and deficits are far worse. Yet, GBP has already been endlessly punished, and similar to the USD, could rally “by default” due to dimmer prospects elsewhere relative to previous expectations.
CHF: The Swiss franc has become the latest, most impressive victim of maximum intervention, which makes the world believe that no fiat currency can be a true safe haven forever. We assume that the determination of the SNB and Swiss Government will keep the CHF weaker.
AUD: Aussie did sell-off when risk appetite swooned in early August, but it is far too resilient given risk averse circumstances, prospects for slower growth in Asia, and on the risk of a disorderly unwinding of the domestic housing market. A heady adjustment lower could finally arrive in Q4 for the Aussie.
CAD: It will continue to trade as an “in-betweener” – a lower beta risk currency that may find resilience in its exposure to a less weak than feared U.S. economy. Still, the currency has only so much upside despite the solidity of the sovereign balance sheet and banks, as Canada features the world’s most overleveraged consumer.
NZD: Some of its strength has derived from economic activity from earthquake rebuilding and some of it from Chinese diversification interest (which throws huge weight around in the less liquid kiwi). The rally could falter in Q4 on weaker than expected Asian growth prospects and as the RBNZ stays pat.
SEK: Likely to remain a pro-cyclical currency – the country could face a slowdown that could be multiplied by a European demand slowdown. In addition, Sweden’s housing market is a raging bubble, though the signs of strain have yet to show much. Could they begin to do so in Q4?
NOK: Rate expectations have tumbled as with most other currencies where there is enough rate to cut. NOK may find a safe harbour bid to a degree due to the country’s unmatched sovereign balance sheet, so strength versus the most pro-cyclical currencies might come into play in Q4 and Q1.

Market Preview - 11 October 2011

Forex Overnight: EUR trading weaker against USD
The EUR has weakened against the USD, this morning, ahead of Slovakia’s final vote on the enlarged European Financial Stability Facility later in the day. Reports suggest that Slovakia’s ruling coalition was unable to end a dispute over participation in the euro-area bailout fund. The GBP has lost ground against the USD, this morning, ahead of a report, scheduled for release later today, which is expected to show that the U.K. industrial production declined in August. At 6 am, the EUR and the GBP have declined 0.1 percent and 0.3 percent against the USD, to trade at $1.3632 and $1.5618, respectively.
The JPY is trading 0.1 percent higher against the EUR, while it has edged marginally higher against the USD, ahead of the release of the minutes of the Federal Reserve’s (Fed) September meeting, later today.

UK Stocks: Likely to open in negative territory
The FTSE 100 is likely to open 6 to 8 points in the red.
Key economic indicators scheduled for release today include Industrial & Manufacturing Production, NIESR Gross Domestic Product Estimate and DCLG U.K. House Prices.
N Brown Group, Edinburgh Dragon Trust, Epistem Holdings and Fusion IP are scheduled to report their results later today.
Royal Dutch Shell has announced force majeure on its exports of Nigerian Forcados crude, following a leak on the Trans Forcados pipeline.
In an interview with the Financial Times, Steve Bertamini, the Head of retail and SME banking at Standard Chartered, has criticised western regulators for using the wrong mechanisms to handle the financial crisis.
Ian Cheshire, the CEO of Kingfisher, has forecast a “broadly flat” retail market in the U.K. for 2012, and added that it would be “more robust” in France.

Asia: Trading in the green
Asian markets are trading in positive territory this morning, amid continued optimism that European leaders would be able to stem the region’s debt crisis.
In Japan, markets are trading higher, with Sumitomo Mitsui Financial and Mitsubishi UFJ Financial Group trading up, amid renewed optimism over the prospectus of a solution to the European debt crisis. Toyota Motor has jumped, after it reported a rise in Chinese sales in September. Nidec Corporation has soared, after it announced an increase in its share buyback plan. At 6 am, the Nikkei 225 is trading 2.1 percent higher, at 8,787.5.
In China, Industrial & Commercial Bank of China, China Construction Bank Corporation, Bank of China and Agricultural Bank of China have added value, after state-run Central Huijin Investment bought shares in these banks. In South Korea, Shinhan Financial Group and KB Financial Group Inc have risen, amid optimism that the Eurozone debt crisis will be resolved. Shinsegae Company and Hyundai Department Store have gained, after South Korean wholesale inflation in September eased. In Hong Kong, markets are trading in positive territory, following China’s support for banking stocks.

US Stocks: Futures trading in the red
At 6 am, S&P 500 futures are trading 3.1 points weaker.
NFIB Small Business Optimism and IBD/TIPP Economic Optimism are the key economic indicators scheduled for release today. Investors also await the release of minutes of the Fed’s 20 September 2011 FOMC Meeting.
Alcoa, WD 40 Co, Synergetics USA, Century BanCorp, and Joe’s Jeans are scheduled to announce their results later today.
Felcor Lodging Trust, the top gainer in after hours trading session yesterday, soared 7.0 percent. Standard Pacific, Amylin Pharmaceuticals and Sotheby’s featured amongst the other major gainers, advancing 5.6 percent, 3.9 percent and 3.9 percent, respectively. Mistras Group advanced 3.3 percent, after its first quarter results surpassed market expectations. Sally Beauty Holdings declined 4.3 percent, after it announced a secondary offering of 15.0 million shares of common stock. Amongst the other key laggards, GNC Holdings, La-Z-Boy and CME Group plunged 9.8 percent, 9.3 percent and 4.6 percent, respectively.
Yesterday, the S&P 500 index surged 3.4 percent, after German and French leaders pledged to present a comprehensive plan to tackle the Eurozone debt crisis and recapitalise European banks. Denbury Resources, the top gainer on the S&P 500 index, rallied 9.6 percent. Record breaking pre-orders for iPhone 4S helped Apple to climb 5.1 percent. Higher metal prices led Alpha Natural Resources, Cliffs Natural Resources and Freeport-McMoRan Copper & Gold to surge 8.9 percent, 8.6 percent and 5.9 percent, respectively. Banking sector stocks, Citigroup, Morgan Stanley, Wells Fargo & Co and Bank of America Corporation soared 7.6 percent, 7.4 percent, 6.5 percent and 6.4 percent, respectively, as risk appetite amongst investors increased. Micron Technology jumped 4.2 percent, after a broker upgraded its rating on the stock to “Buy” from “Hold”. Sprint Nextel Corporation plunged 7.9 percent, after a broker downgraded its rating on the stock to “Neutral” from “Buy”. Netflix declined 4.8 percent, even as it abandoned plans to breakup its DVD-by-mail and online streaming services.

European Stocks: Expected to open marginally higher
The DAX and CAC are expected to open 7 to 8 points and 3 points, firmer, respectively.
No major economic indicators are scheduled for release today.
Givaudan SA, Banco Espanol De Credito SA, Vilmorin & Cie SA and CropEnergies AG are scheduled to report their results later today.
Roche Holding AG has indicated that a small early-stage study has revealed that its experimental drug showed promise in the treatment of Alzheimer’s disease.
Louis Gallois, the CEO of EADS, has stated that the company has not been affected by the difficulties French banks are facing in securing dollar financing.
Reuters has reported that the European Commission would not include over-the-counter derivatives in its review of Deutsche Boerse AG’s planned takeover of NYSE Euronext.

Macro Update
Japan's current account surplus drops
Japan's current account surplus has dropped 64.3 percent Y-o-Y to ¥407.5 billion in August, and sharply lower from the ¥990.2 billion surplus in July.
UK retail sales increase
On a monthly basis, overall retail sales in the U.K., as measured by the British Retail Consortium, have climbed 2.5 percent in September, compared to a 1.5 percent rise in August.
Optimistic on stimulus impact, says Miles
Bank of England policy maker, David Miles, has stated that there are “good reasons” to think that the Central Bank’s expansion of stimulus will aid economic recovery.
ECB backs bond guarantee option
The European Central Bank (ECB) has indicated that it favours government guarantees rather than the Central Bank’s money market operations to strengthen European bailout fund.
Greece pledges to keep creditor promises
The Greek Finance Minister, Evangelos Venizelos, has stated that the Greek government will keep promises to international creditors on pension and wage cuts.
European leaders postpone summit
European leaders have pushed back a debt crisis summit from October 18 to October 23, amid opposition to the German Chancellor, Angela Merkel’s drive for deeper-than-planned write-downs of Greek bonds.

Euro Weak in the Knees Again as Week/Month/Quarter Ends

The Euro ground lower today after a German minister said further EFSF expansion was not likely and despite a very high CPI estimate for September. Bonds rebounded from key support and risk remains on the defensive.

The US and German 10-year benchmarks continued to flirt with the 2 percent yield level, but both have failed to take out that support level and the strong rebound in bonds today suggested a renewed bout of safe haven seeking, particularly after a very high Euro Zone September CPI estimate failed to generate sustainable selling interest. Ahead of today’s trading session, Germany’s economy minister Roesler said in a television interview that German lawmakers were unlikely to approve another raising of the EFSF ceiling or an effective increase in the fund through leveraging. Among our usual indicator suspects: Euro 3-month basis swaps also eased another couple of bps lower (more pressure on Euro) and Italian/German yield spreads widened out again by the early US hours after attempting to tighten earlier in the day.

The action in bond markets is spilling over to JPY crosses as today marks the end of the first half of the year in Japan and the end of the quarter for the rest of the financial world. EURJPY topped  out again well above 104 but was pushed sharply back lower on the enthusiastic rally in Bunds today. It is interesting that USDJPY remained joined at the hip despite considerable volatility in rate spreads between the US and the Japan this week – apparently the market is content to express the volatility in rate spreads in non-USD terms, but USDJPY can’t remain in a vice grip forever. The Bank of Japan will see considerable pressure if we get another wave of risk off soon and global government bond yields probe their recent cycle lows.

Looking ahead
Some of the moves yesterday across markets certainly looked a bit like they might have been driven by end of month/quarter flows and that kind of activity could continue for the rest of the day today. This week has mostly been one vicious churn for those looking for a directional move – though a swoon in risk in the US session today could put an exclamation point on weekly candlesticks. Next week offers plenty in the way of even risks, certainly worth mentioning here, though we are likely to refresh this list on Monday:

• Central Bank Meetings: RBA (Wednesday) and ECB, BoE (Thursday), BoJ (Friday)
• Euro Zone: EcoFin meetings on Monday and Tuesday
• US Data: ISM Manufacturing (Monday), ISM Non-Manufacturing (Wednesday), US Employment Report (Friday)
• Other Highlights: Japan Q3 Tankan (Monday) Fed’s Bernanke to Testify (Tuesday) Canada Employment Report (Friday)

The Bernanke appearance on Tuesday will be an interesting appearance before the Joint Economic Committee, which includes Ron Paul, who will likely take the opportunity once again to bash the Fed and demand it be audited. Let’s not forget he’s a presidential candidate with a campaign in need of a boost as well.

Chart: AUDUSD Weekly 
AUDUSD challenging key levels last week and this week, confirming the huge trendline break from the 2009 lows. From here, there is a gap down to the sub-94 area and then not much to hold the pair until 0.8250. 

We asked this Monday whether the market might be treacherous for the balance of the week. (“Could heavy positioning and heavy batch of event risks mean more of this kind of churn in markets for the rest of the week?”) Next week is unlikely to yield the same result – either the risk bears give up here for a short while and the range expands upward a bit (though without changing secular trend) or the action heats up again to the downside and we start to see a full capitulation unfolding. Regardless, it behooves all of us to be careful out there, particularly since, given the backdrop, the odds of the latter remain elevated.


Economic Data Highlights

• Germany Aug. Retail Sales out at -2.9% MoM vs. -0.5% expected
• Norway Sep. Unemployment Rate out at 2.5% vs. 2.6% expected and 2.7% in Aug.
• Norway Aug. Credit Growth Indicator out at +6.5% YoY vs. +6.3% expected and +6.3% in Jul.
• Euro Zone Sep. CPI Estimate out at +3.0% YoY vs. +2.5% expected and +2.5% in Aug.
• Switzerland Sep. KOF Swiss Leading Indicator out at 1.21 vs. 1.30 expected and 1.61 in Aug.
• US Personal Income out at -0.1% MoM vs. +0.1% expected
• US Personal Spending out at +0.2% MoM as expected 
• US PCE Core out at +0.1% MoM and +1.6% YoY vs. +0.2%/+1.7% expected, respectively and vs. +1.6% in Jul.
• Canada Jul. GDP rose +0.3% MoM and +2.3% YoY as expected and vs. +2.1% in Jun.

Upcoming Economic Calendar Highlights (all times GMT)

• Chicago Sep. Chicago PMI (1345)
• US Sep. Final University of Michigan Confidence (1355)
• US Sep. NAPM – Milwaukee (140)
• US Fed’s Bullard to Speak (1500)
• China Sep. PMI Manufacturing (Sat 0100)
• Australia Sep. AiG Performance of Manufacturing Index (Sun 2230)
• Japan Q3 Tankan survey (Sunday 2350)
• China Sep. Non-manufacturing PMI (Mon 0100)

China PMI Data in Focus - Hard Landing Ahead, or ?

Eurozone manufacturing PMI has been trending lower since February, U.S. manufacturing ISM from the same date while China’s retreat was delayed for one month, testimony to the global economic slowdown we have been experiencing.

Source: Bloomberg

China will be the first to release data for September with the flash HSBC manufacturing PMI, which is based on 85-90 percent of survey responses, already released on 22 September and showing a reading of 49.4, slightly softer than the 49.9 posted in August and notably still below the 50/50 contraction/expansion threshold. The details behind August’s second month below the 50 mark showed orders contracting at the same rate as July but, perhaps more worrying, new orders showed a faster pace of decline. If we get a final reading below 50 again, this would be the third month in a row and most likely heighten the debate as to whether China is heading towards a hard landing or not.

The official PMI survey, which surveys almost twice the number of companies as the HSBC/Markit survey, has remained resiliently above the 50 mark since February 2009 and analysts note that this is likely because larger state-owned enterprises are included, which might not have been affected to as great a degree by the authorities’ recent tightening campaign. The latest median forecasts suggest a mild pick-up to 51.1 though the range of estimates varies from 50.3 to 52.2. We would prefer to cast our forecast below median estimates at 50.9.

The HSBC PMI manufacturing data is released on 30 September at 0230GMT. The official PMI is released on 1 October at 0100GMT.

The Euro Collapse Could Wipe Out this Big U.S. Bank

With French banks now a daily highlight in the market's search for the next source of contagion, and big, multi-syllable words such as conservatorship and nationalization being thrown about with increasingly reckless abandon, perhaps it is time to consider the downstream effects of a French bank blow up. And we are not talking French sovereign troubles, which are about to get far worse with the country's CDS once again at record highs means the country's AAA rating is as good as gone.

No: banks, as in those entities that are completely locked out from the dollar funding market, and which will be toppled following a few major redemption requests in native USD currency. Which in turn brings us to...

Morgan Stanley, the little bank that everyone continues to ignore for assumptions of a pristine balance sheet and no mortgage exposure. Well, hopefully we can debunk one of these assumptions by presenting...

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A Critical Weekend for the Euro

Yesterday we got coordinated central bank action to ease USD funding pressures in Europe. Now we have “informal” (read: extremely urgent emergency) two-day meeting of the Eurogroup finance ministers with US Treasury’s Geithner in attendance.

All eyes on Eurogroup meeting

Today and tomorrow, an “informal” Eurogroup meeting of all EU finance ministers is meeting in Wroclaw, Poland to discuss the next steps in addressing the EU’s ongoing financial crisis. Informal is hardly the word – the politicians and ECB will need to act now and in a big way as it is crunch time for the EU and its financial system. US Treasury Secretary Geithner will also be in attendance.

Yesterday, an article from Reuters made the rounds that suggested Geithner was recommending to his European colleagues that they “leverage up” the EFSF to sufficient size to get ahead of the pressures of the sovereign debt debacle, similar to the way the TALF program was employed to leverage public sector funds in the US. The challenges is that the EU governments have yet to ratify the new intervention powers of the EFSF that were agreed upon at the last Greek bailout round 2.0 meetings. The stakes of this meeting are rather clear after a rather breathtaking couple of weeks for the single currency, which saw a 1000-pip drop in EURUSD and the need for a coordinated central bank intervention to dig EU banks out of trouble from USD funding pressures.

But this “bailout” by liquidity yesterday is merely another stopgap measure – like throwing up a dam in front of a raging torrent that will eventually dissolve it only to continue raging until something  more permanent is crafted. To keep markets orderly and banks from failing across the EU, we’ll eventually need to see a sufficiently large package/commitment to stop the chronic return of funding difficulties, default risks, defunct regional  bond markets (the EU effectively ceases to function if Italy can’t sell/roll its debt). The “best” solution of course is a single EU finance ministry and the ability for it to issue EuroBonds – but that too big a step, at least for this weekend’s meeting. But this weekend could give us an indication whether the EU leadership is going to retrench and put more effort in moving in this direction, or whether we get more of the same (an alphabet soup of kick the can liquidity measures or simply the hope that the EFSF can be inflated to sufficient size to suffice).Remember my basic tenet that either it is Lehmanesque crisis time, or we get the Eureka moment that the solution is a de facto QE that continues to weigh heavily on the EURUSD.

Elsewhere, there is little to discuss, because there is no elsewhere at the moment. The US calendar only features the preliminary University of Michigan Confidence reading for September. But looking ahead, next week’s open will be very interesting in the wake of this Eurogroup meeting and we have to anticipate the coming FOMC meeting on Wednesday. In that light, an article title on the Bloomberg this morning trumpeted “Yen rally seen ending on Operation Twist” with the idea that the Fed’s interest in raising the yields slightly at the front end of the yield curve could relieve the pressure on the JPY to strengthen. Worth consideration.

Economic Data Highlights

• New Zealand Sep. ANZ Consumer Confidence out at 112.6 vs. 113.3 in Aug.

Upcoming Economic Calendar Highlights (all times GMT)

• EuroZone Jul. Trade Balance (0800)
• Canada International Security Transactions (1230)
• US Jul. Total Net Long-term TIC Flows (1300)
• US Sep. Preliminary University of Michigan Confidence (1355)

Daily Report: Focus Turns to EU Meeting in Poland

Markets responded positively to yesterday's joint announcement by ECB and other major central banks to provide liquidity to Eurozone's banking system through the end of the year. DOW rose 186 pts while Asian equities follow today with Nikkei up 195 pts and broad based strength is seen in other Asian indices. Dollar index is back trading below 76.5 level as major currencies recovered against the greenback. Focus will now turn to EU Finance Ministers meeting in Poland, where UK Chancellor Osbourne and US Treasury Geithner will join. Main focus of discussion is on efforts to ratify the EUR 109b second bailout of Greece. European Commission President Barroso's proposal on eurobonds would likely be discussed there. Geithner is expected to talk about the possibility of leveraging the EUR 440b EFSF fund, like what US did back in 2008 in tackling the credit crunch. Back then, under the Term Asset-Backed Securities Loan Facility, US treasury offered up to USD 20b in credit protection to New York Fed, allowing it to lend up to USD 200b in return.

Yesterday, the ECB announced that, in coordination with the Fed, the BOE, the BOJ and the SNB, to conduct 3-month USD liquidity operations for 3 times through the year. In addition to the 7-day USD facility announced on May 10, 2010, the new operation aims to ensure sufficient liquidity in banks. The offerings will be carried out at in the form of repo, at fixed rate and with full allotment. Tender dates will be October 12, November 9 and December 7. The move had sent stocks higher on improved sentiment as central bankers attempted to ease liquidity problems associated to Eurozone's sovereign debt crisis.

On the data front, Eurozone current account and trade balance will be released in European session. Canadian international securities transactions, US TIC capital flow and U of Michigan consumer sentiment will be the main focus in US session.

Relieve in Eurozone liquidity condition is quite well reflected in XAU/EUR's sharp fall yesterday. Also, it's getting increasing likely that 1374.77 is a medium term formed on bearish divergence condition in daily MACD, after hitting 261.8% projection of 954.11 to 1088.1 from 1021.21 at 1372. Deeper decline should be seen in near term to 55 days EMA (now at 1222.5) and possibly below. Nevertheless, there should be trend reversal yet and we'd expect strong support above 61.8% retracement of 1021.21 to 1374.77 at 1156.27 to contain downside and bring rebound to extend the consolidation from 1374.77.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 105.33; (P) 106.16; (R1) 107.23; 

EUR/JPY's recovery from 103.88 extends further to as high as 106.98 so far and is pressing 4 hours 55 EMA. Further rise might be seen but at this point, we'd continue to expect upside to be limited by 108.01 support turned resistance and bring fall resumption. Below 105.08 minor support will flip bias back to the downside and should send EUR/JPY through 103.88 towards next medium term target at 102.42.

In the bigger picture, the break of 105.42 support indicates that whole down trend from 169.96 has resumed. As noted before, the up trend in weekly MACD is broken and EUR/JPY is possibly building up downside momentum again. Next target will be 61.8% projection of 139.21 to 105.42 from 123.31 at 102.42. And sustained break there will pave the way to 100% projection at 89.52, which is close to 88.96 all time low. On the upside, break of 123.31 resistance is needed to confirm trend reversal or we'll stay bearish. 

Euro Crisis Similar to 2008 Crash; Does the Euro Have a Future?

The euro crisis is a direct consequence of the crash of 2008. When Lehman Brothers failed, the entire financial system started to collapse and had to be put on artificial life support. This took the form of substituting the sovereign credit of governments for the bank and other credit that had collapsed. At a memorable meeting of European finance ministers in November 2008, they guaranteed that no other financial institutions that are important to the workings of the financial system would be allowed to fail, and their example was followed by the United States.

Angela Merkel then declared that the guarantee should be exercised by each European state individually, not by the European Union or the eurozone acting as a whole. This sowed the seeds of the euro crisis because it revealed and activated a hidden weakness in the construction of the euro: the lack of a common treasury. The crisis itself erupted more than a year later, in 2010.

There is some similarity between the euro crisis and the subprime crisis that caused the crash of 2008. In each case a supposedly riskless asset—collateralized debt obligations (CDOs), based largely on mortgages, in 2008, and European government bonds now—lost some or all of their value.

Unfortunately the euro crisis is more intractable. In 2008 the U.S. financial authorities that were needed to respond to the crisis were in place; at present in the eurozone one of these authorities, the common treasury, has yet to be brought into existence. This requires a political process involving a number of sovereign states. That is what has made the problem so severe. The political will to create a common European treasury was absent in the first place; and since the time when the euro was created the political cohesion of the European Union has greatly deteriorated. As a result there is no clearly visible solution to the euro crisis. In its absence the authorities have been trying to buy time.

In an ordinary financial crisis this tactic works: with the passage of time the panic subsides and confidence returns. But in this case time has been working against the authorities. Since the political will is missing, the problems continue to grow larger while the politics are also becoming more poisonous.

It takes a crisis to make the politically impossible possible. Under the pressure of a financial crisis the authorities take whatever steps are necessary to hold the system together, but they only do the minimum and that is soon perceived by the financial markets as inadequate. That is how one crisis leads to another. So Europe is condemned to a seemingly unending series of crises. Measures that would have worked if they had they been adopted earlier turn out to be inadequate by the time they become politically possible. This is the key to understanding the euro crisis.

Where are we now in this process? The outlines of the missing ingredient, namely a common treasury, are beginning to emerge. They are to be found in the European Financial Stability Facility (EFSF)—agreed on by twenty-seven member states of the EU in May 2010—and its successor, after 2013, the European Stability Mechanism (ESM). But the EFSF is not adequately capitalized and its functions are not adequately defined. It is supposed to provide a safety net for the eurozone as a whole, but in practice it has been tailored to finance the rescue packages for three small countries: Greece, Portugal, and Ireland; it is not large enough to support bigger countries like Spain or Italy. Nor was it originally meant to deal with the problems of the banking system, although its scope has subsequently been extended to include banks as well as sovereign states. Its biggest shortcoming is that it is purely a fund-raising mechanism; the authority to spend the money is left with the governments of the member countries. This renders the EFSF useless in responding to a crisis; it has to await instructions from the member countries.

The situation has been further aggravated by the recent decision of the German Constitutional Court. While the court found that the EFSF is constitutional, it prohibited any future guarantees benefiting additional states without the prior approval of the budget committee of the Bundestag. This will greatly constrain the discretionary powers of the German government in confronting future crises.

Read the full article here 

The Downgrade of Europe Has Begun

Ladies and gents, it starts. Credit Agricole and BNP downgrades imminent.

 

Moody's downgrades long-term ratings to Aa3 on normalised systemic support, Outlook negative, BFSR remains on review to consider impact of funding challenges on credit profile
 
Further to the review initiated on 15 June, 2011
 
 
Paris, September 14, 2011 -- Moody's Investors Service has announced an extension of its review of the C+ standalone Bank Financial Strength Rating (BFSR) of Societe Generale SA (SocGen), equivalent to a standalone Baseline Credit Assessment (BCA) of A2 on the long-term ratings scale, originally announced on 15 June, 2011. While Moody's concluded that SocGen's capital base currently provides an adequate cushion to support its Greek, Portuguese, and Irish exposures, Moody's announced that it will extend its review for downgrade of the C+ BFSR to consider the implications of the potentially persistent fragility in the bank financing markets, given its continued reliance on wholesale funding.
 
As announced in our press release of 15 June 2011, however, Moody's review also encompassed a re-consideration of systemic support assumptions factored into SocGen's long-term debt and deposit ratings under our Joint-Default Approach (JDA). Moody's has today concluded this aspect of the review by downgrading SocGen's debt and deposit ratings by one notch to Aa3 from Aa2. The outlook on the long-term debt ratings is negative. Moody's anticipates that the impact of our review on the BFSR would be limited to a one-notch downgrade, which would not in itself impact the long-term ratings given our revised support assumptions for SocGen, which anticipate increased uplift at a lower standalone rating level. However, a conclusion with a negative outlook on the BFSR would lead to a renewed negative outlook on the long-term ratings. Given this possibility, we are maintaining our negative outlook on the long-term ratings during the review of the BFSR.

Read full article...

Daily Report: Concern on European Sovereign Crisis Sends Gold to Record High, Dollar Firm

Concerns over European sovereign crisis continue to wait on market sentiments and support dollar and yen. Funds continue to flow into safe haven assets, pushing gold to new record high against dollar and euro. Dollar index's break of 75.38 resistance suggests more upside in the greenback in near term. Asian equities are broadly lower with Japanese Nikkei closed at the lowest level since April 2009. Meanwhile, German bund yields extends recent decline and reached new all time low of 1.799%.

There were intensified worry as ECB and the IMF were in disagreement regarding the capital requirements of European banks. In a draft of the Global Financial Stability Report, the IMF unveiled that the funding needs for European banks would be as much as 200B euro. ECB President Trichet said 'there is a very important disagreement on the methods for calculating the capital needs' and he is 'convinced that the final IMF figure will not be that[probably much lower]'. At the same time, Trichet urged debt-ridden countries such as Greece and Italy to strictly implement austerity measures as planned.

As expected the RBA left the cash rate unchanged at 4.75% in September. The initial market reaction was a rebound in the Aussie as the post-meeting statement turned out to be less dovish than previously anticipated. The central bank attributed the pause to the growing uncertainty in global economic outlook. Recent developments have damped confidence and tamed inflation. Against some of the market participants' forecasts, the RBA did not hint any signs on rate cut.

On the data front, UK BRC retail sales monitor dropped -0.6% yoy in August. Australian current account deficit narrowed to AUD -7.4b in Q2 but was wider than expected. Australian home loans rose 1.0% in July CPI dropped -0.3% mom rose 0.2% yoy in August. Looking ahead Eurozone CPI revision, German factory orders will be released. Main focus should be on US ISM non-manufacturing index while is expected to drop 51.3.

XAU/EUR's uptrend resumes this week by taking out 1331.41 resistance and reaches as high as 1366.56 so far. There is no sign of topping yet and further rise is still expected. Break of 261.8% projection of 954 to 1088 from 1021 at 1372 should send XAU/EUR through 1400 psychological level. 

Dollar index's break of 75.38 minor resistance suggests that stronger rebound is under way for 76.71 resistance. It also raises the chance that whole down trend from 88.70 has completed at 72.69 already. Nevertheless, we'd still prefer to see sustained break of 76.71 to confirm. Otherwise,we'll stay neutral. 

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.4045; (P) 1.4109 (R1) 1.4158; 

EUR/USD's fall from 1.4548 extends further to as low as 1.4038 and breaks mentioned 1.4054 support. Intraday bias remains on the downside and further decline should now be seen towards 1.3837 support next. On the upside, above 1.4175 minor resistance will turn bias neutral and bring recovery first. But after all, as long as 1.4548 resistance holds, consolidations from 1.4939 is still in progress and more choppy sideway trading would be seen in near term.

In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3941) and thus, rise from there should still be in progress. Break of 1.4939 should confirm rally resumption and should send EUR/USD through 1.5143 resistance towards 1.6039 high. However, considering that weekly MACD has been staying below signal line for some time now, a break below 1.3837 will have the trend line support, as well as 55 weeks EMA firmly taken out. That would argue that the rally from 1.1875 has indeed finished and will bring deeper fall towards 1.2873 support and possibly below.

Weekly Review and Outlook: Sentiments to Deteriorate Further in a Week of Central Bank Meetings

While the market sentiments have stabilized in the last few weeks, the theme didn't change. Occupying investors' mind are the fear of global recession as well and the never-ending European debt crisis. There is increasing chance that Fed will announce some sort of QE3 problem later in the month. But markets are also getting increasingly inconvinced by effectiveness of further easing from Fed on saving economic recovery. DOW and S&P 500 spent most of the week recovering, but the hard work was undone after a poor job report from US and both indices indeed closed the week mildly lower. Safe haven assets regained much ground last week with US 10 year yields closed below 2% at 1.99%, just 4 points above the record low. German 10 yield bund yields also dropped to a record low of 1.996 before closing at 2.01%. Gold surged 3.15% on Friday at 1876.9 and is heading back to 1900. In the currency markets, Swiss Franc rebounded strongly last week after SNB refrained from announcing new measures to curb the currency's gains while dollar index staged a strong rebound. Sentiments are vulnerable to further deterioration this week and next before FOMC meets on September 20.

Economic data were generally poor. US August non-farm payroll showed 0k job growth, against expectation of 90k. 17k of private sector job growth was offset by -17k government cuts. Gains for July was revised down from 117k to 85k while that for June was also revised down from 46k to 20k. Unemployment rate was unchanged at 9.1%. US consumer confidence plunged to 44.5 in August. ISM manufacturing avoided dipping into contraction region below 50 but did dropped slightly to 50.6 in August. Eurozone PMI manufacturing was revised down to 49 in August, while UK manufacturing PMI dropped to 49, both suggesting deeper contraction. China manufacturing PMI recovered slightly to 50.9 in August but missed expectation of 51.

The minutes of the August FOMC meeting unveiled that 'a few members' preferred 'a more substantial move at this meeting'. The range of tools that policymakers discussed to stimulate the economy included reinforcing forward guidance about the likely path of monetary policy, additional asset purchases, increasing the average maturity of securities holdings, reducing the interest rate paid on excess reserve balances. Policymakers did not show preference on the stimulating tools but they 'agreed that the September meeting should be extended to two days' as more time is needed for discussion. 

Greece came back to spotlight again on worry that the country would miss its7.4% budget deficit target, which is a key condition in funding of the original EUR 100b bailout package and that was admitted by Finance minister Evangelos Venizelos. IMF has confirmed that the "mission has temporarily left Athens to allow the authorities to complete technical work related to the 2012 budget and growth-enhancing structural reforms". Greece is given ten days to come up with proposals to put the austerity plan back on track and the talk between Greece and IMF will resume on September 15. Greek two-year yields soared above 47 percent.

On the other hand, there were increasing concern over Italy's waffling on its austerity proposal. The latest revision involves a increased crackdown on tax evasions which triggered criticism from many parties. Also there were concerns that the new proposal will create EUR 7b hole in the EUR 45b austerity plan agreed on August 5. ECB stepped up pressure on Italy as Trichet warned on Saturday that "it is essential that the target which was announced to diminish the deficit will be fully confirmed and implemented. And it's "absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and of its creditworthiness".

Swiss Franc was notably stronger last week. Prior to Wednesday, where SNB usually announce new measures, markets have been anticipate some sort of announcements, like deposit taxes, to further curb Franc strength. However, nothing happened. And there are speculations that SNB is so far comfortable with EUR/CHF now well above parity and would refrain from more intervention in near term. We'd anticipate some more Franc strength in near termon risk aversion but will be cautious on reversal as it's believed that SNB is strongly determined to defend parity in EUR/CHF.

Technical Highlights

DOW's rebound from 10604 did extended further to as high as 11716 last week but faced strong resistance from 55 days EMA and 11862 prior support and reversed. It's likely that such corrective recovery is finished with three waves up already and the index is now vulnerable for more downside ahead. We'll be cautiously bearish for 10604 in near term, possibly later this month. Break there will resume the correct down trend from 12876 towards 9614 cluster support (50% retracement of 6470 to 12876 at 9672. In any case, we'll stay bearish as long as 11862 resistance holds. 

XAU/EUR staged a strong rebound last week and pull back from 1331.41 has apparently finished at 1180.07 already. XAU/EUR is holding well above the rising 55 days EMA and the up trend is still intact. We're cautiously bullish this week as long as 1280 minor support holds. Break of 1331.41 will confirm up trend resumption for 261.8% projection of 954 to 1088 from 1021 at 1372 next. 

Dollar index rebounded strongly last week but it's, after all, still staying in range of 73.42/75.38. Outlook remains rather mixed for the moment and we'll stay neutral before a break out. On the downside, below 73.42 will suggest that down trend from 88.70 is still in progress and resuming for 72.69 and below. On the upside, above 75.38 will turn bias to the upside for 76.71. Break there will in turn indicate that 72.69 is already the medium term bottom and the trend has reversed. 

The Week Ahead

Five central banks will meet this week, RBA, BoC, BoJ, BoE, ECB. ECB will be of particular interest as Trichet hinted on possible downward revision in its growth and inflation forecasts. We argued that ECB Remains on Hold Through 2012 and will look for some comments from Trichet to affirm this view. Also, BoJ is expected to remain accommodative after FM Noda became the new PM. RBA is expected to be stand pat at 4.75% through 2011. There are speculations on rate cut but so far they're not supported by economic data yet.

• Monday: Eurozone services PMI, Sentix Investor Confidence, retail sales; UK services PMI
• Tuesday: RBA rate decision; Swiss CPI; Eurozone GDP revision; US ISM non-manufacturing
• Wednesday: Australia GDP; BoJ rate decision; UK industrial and manufacturing production; BoC rate decision, Ivey PMI; Fed's Beige Book
• Thursday: Australia employment; Swiss unemployment; BoE rate decision; ECB rate decision; Canada building permits, trade balance; US trade balance, jobless claims.
• Friday: Japan GDP; China CPI; UK PPI, trade balance; Canada employment, housing starts.

USD/CAD Weekly Outlook

USD/CAD's consolidation from 1.0009 continued last week with a dip to 0.9725 but quickly rebounded. Current development suggests that such consolidation is possibly finished already. Initial bias is mildly on the upside for retesting 1.0009 first. Break will confirm resumption of whole rise from 0.9406 and should target 61.8% retracement of 1.0851 to 0.9406 at 1.0299. However, break of 0.9725 will now dampen this bullish view and will turn focus back to 0.9406 instead.

In the bigger picture, a medium term bottom is possibly formed at 0.9406 on bullish convergence condition in weekly MACD. Further rise is in favor for a test on key resistance level at 1.0851 and break there will confirm completion of the down trend from 2009 high of 1.3063. However, sustained trading below 55 days EMA (now at 0.9743) will dampen this bullish case and argue that down trend from 1.3063 (2009 high) is still in progress for another low below 0.9406.

In the longer term picture, firstly, there is no clear indication that the long term down trend from 2002 high of 1.6196 has reversed. Secondly, the medium term fall from 1.3063 is so far looking corrective. Hence, we're slightly favoring the case that price actions from 0.9056 are developing into a long term corrective pattern.

Daily Report: Euro Eases on Disappointment of Franco-German Summit, Focus Shifts to SNB Meeting

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.

Aussie Rises despite Rising Unemployment

The Aussie rose against the U.S. dollar and the euro on Thursday despite rising unemployment. At around 5:48 am GMT, the greenback traded around 0.9732, or 0.94% below its previous close. At the same time, the euro surrendered 0.51% of its value to stand around $1.3858.

The Aussie has managed to defy the odds and gather strength against the two major currencies despite disappointing jobs market results. According to the Australian Bureau of Statistics, Australia's unemployment rate increased to 5.1% in July from 4.9% in June. The results came as a surprise to the analysts, who expected the economy to add 13,750 new jobs. Instead, Australia's weakening economy slashed 100 jobs.

Australia has been the star performer among the developed countries in recent years. In fact, it was the only developed nation to avoid a recession following the financial markets meltdown. However, the Australian economy was hit hard by the Queensland floods, which have created havoc among the communities living there. At the same time, the floods interrupted mining operations in the area. Australia is abundant with natural resources and high price levels for a number of commodities have provided a lot of tailwind for its economy in recent years.

Things might be about to change. The debt crises in the United States and the Eurozone seem to be feeding on each other and there is increasing speculation that Europe and North America might be on their way to a double-dip recession. At the same time, China has to squeeze its belt ever tighter in its so far futile attempts to control rising inflation. China is the world's largest consumer of raw materials and an increasingly important trading partner for commodity exporters such as Australia. A slowdown in China might in fact be an equally big threat to the Australian economy as a debt fiasco in the Eurozone and the United States.

With signs that global demand is faltering, prices of commodities have started to come down. 

Crude oil, which has been trading around $100 for a while, has dropped to low eighties. Presently, crude oil stands around $82.81, or 1.41% above its previous close. Natural gas has sunk below the $4 barrier, falling 0.2% to trade around $3.995. At the same time, copper has rebounded in Thursday's early trading session, having fallen below the $4 mark as well. At the moment, copper stand around $4.008, or 2.84% above its previous close. The one exception in the downward trend for commodities is gold. The yellow metal has briefly moved past the $1,800 mark, but has retreated since. Currently, the yellow metal trades around $1,787.35, or 0.18% below its previous close. With debt woes mounting in the Eurozone and the United States, it seems only the sky is the limit for the world's most popular safe-haven.

More positive news for the Australian economy came from inflation expectations data. According to the Melbourne University Institute, consumers expect prices to increase by 2.7% in the next 12 months. In July, consumers expected prices to rise by 3.4%. The latest reduction in inflationary expectations might provide some room for the Reserve bank of Australia to cut its interest rates in an attempt to boost Australia's ailing economy. The Reserve bank of Australia has a price target for the country's inflation rate of 2%-3%. Lower interest rates might be good for the Australian economy. However, it should be bad news for the Aussie.

ACTION ITEMS:

Bullish:
Traders who believe that Australia's economy, helped by high commodity prices, will remain strong compared to the rest of the developed nations, which should provide some steam for the Aussie, might want to consider the following trades:

• Dow Jones-AIG Commodity Index Total Return ETN (NYSE: DJP) is a long play on commodities. DJP may rise if the prices of commodities increase.

• CurrencyShares Australian Dollar Trust ETF (NYSE: FXA [FREE Stock Trend Analysis]) is a long play on the Aussie. FXA may rise if the Aussie appreciates.

Bearish:
Traders who believe that a double dip recession might push prices of commodities much lower, which should create a lot of headwind for the Aussie, may consider an alternate positions:

• PowerShares DB Commodity Short ETN (NYSE: DDP) is a short play on commodities. DDP may rise if the prices of commodities decline.

• ETFS Short Australian Dollar Long US Dollar ETC ETF (SAD) is a short play on the Aussie. SAD may rise if the Aussie depreciates.