Merkel/Sarkozy Help Spark a Risk Off Rally

Market sentiment sees a complete turnaround. USD sold across the board on the back of Merkel and Sarkozy meeting in Berlin. UoM Consumer Sentiment is next. See in our Thursday Premium piece how and why we called for longs in EURUSD, S&P500 but intermediate shorts in gold & silver.

Risk off sentiment continued in Asia which pushed EURUSD back towards 4130 level. Once the London session started, there was a 180 degrees change. USD is weaker across the board on the back of chancellor Merkel and president Sarkozy meeting in Berlin.

Both leaders agreed that they have the same position on Greece and that "private sector involvement in Greece must be voluntary. The German government wants private bondholders to share a part of the losses but it faced a strong opposition. While they both agree that a solution on the Greek issue is necessary and that there is a need to preserve the stability of the euro, not many concrete details have been revealed. Exactly how private entities will be made to voluntarily roll over their bond positions remains to be seen.

Chinese foreign minister also helped to improve the sentiment when he was quoted saying that China has been helping by buying Euro debt and that Europe overcoming its debt crisis is vitally important to China.

The FX market focused on Merkel/Sarkozy meeting and ignored the widening of EZ deficit that reached 2.9B in April worse than 2.2B in March.

New York session news schedule is light today. At 8:30 am ET Canadian Wholesale Sales for April are expected to drop to -0.3% from previous 0.1% followed at 9:55 am ET by US preliminary University of Michigan Consumer Sentiment index for June expected to improve slightly to 74.4 from previous 74.3. This index has experienced three months of straight gains but it is difficult to imagine consumers sentiment to continue to improve while fundamentals deteriorate.

The last news of the week is due at 10:00 am ET. The Leading Indicators index for May is expected to improve to 0.3% from previous -0.3%. Given that markets will still be absorbing the result of Consumer Sentiment released just five minutes earlier, the impact of this index is likely to be limited.

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