EUR

Eurozone leaders agreed to raise the lending armory of the of the EFSF to EUR 440 billion, and up to EUR 500 billion for the EFSFs successorthe European Stability Mechanism (ESM). EU agreed for its European Financial Stability Facility to buy sovereign bonds in the primary market -- but only in the exceptional event whereby a bailed out country enter into agreements with specific policy conditions. The ECB is displeased that EFSF bond purchases would be restricted to the primary market, meaning the central bank will have to continue buying bonds in the secondary market whenever the need arises, thereby further inflation its balance sheet. Meanwhile, Irelands refusal to harmonize (raise) its taxes closer to those in the EU led it to insistence to maintain low taxes did not get it the 100 bp reduction on its interest rate.

EURUSD ignores falling stocks to test $1.40. In the event of no hawkish dissenters by the FOMC tomorrow, expectc EURUSD to retest $1.4040s, followed by 1.4120. Long EURUSD positions are being used as a partial hedge to long USD positions vs AUD and GBP. In the event that 1 or 2 FOMC members express their dissent with QE2, then markets should expect further losses in equities and solid stark stabilization in USD, but largely against AUD, NZD and CHF.


Ashraf