Bank Plan Boosts Euro, 2nd Update for Premium Trades

A report of a plan to recapitalize European banks sparked a sudden reversal in risk appetite in the final hour of US trading. This has offset any downside resulting from the after-hour Moodys downgrade of Italy. Ashraf has added a new set of PREMIUM TRADES. EUR and NZD were the top performers while JPY and GBP lagged. Australian retail sales are a highlight of the Asia-Pacific session.

A 4.2% rally in the S&P 500 in the final hour of trading reversed the risk trade as the index closed up 2.25% to 1124. The gains came after the FT reported that EU leaders have agreed additional measures are needed to recapitalize banks. The details are under discussion but finance ministers are considering coordinated action, the report said.

The snapback is no surprise after crushing negative sentiment gripped markets over the past week. Most currencies gained at least 100 pips against USD and JPY as positions were quickly covered. The reversal still has room to run as several pairs rebound from 500-600 pip declines in the past week.

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Risks are evident, however, as was displayed by the late-day Italian sovereign downgrade. Moodys lowered Italy by three notches to A2 with a negative outlook, immediately clipping 40 pips from EU.

Aside from the risk reversal, the yen fell on signs the Japanese government is getting more aggressive and creative with efforts to weaken the currency. Nikkei reported that the three largest banks will split $43 billion to fund overseas acquisitions. Japan is also considering buying more EFSF bonds, Nikkei said.

Asia-Pacific Preview

AUD initially fell more than 150 pips following the RBA decision but has completely erased those losses. The central bank was not as dovish as expected and did not hint at a rate cut at the upcoming meeting. Although officials are focused on external conditions, the domestic economy offers some risks, primarily to the upside. At 0030 GMT, the retail sales report for September will be released. The RBA has noted cautious demand from households so a reading below the +0.2% consensus (but above -0.3%) would be taken in stride. On the other hand, an upside surprise should give AUD a solid, 50 pip boost.