Biggest Euro Rally in a Year

The Merkel-Sarkozy pledge to draft a plan sparked the largest euro rally in a year and a surge in risk appetite. EUR and AUD were the top performers while USD and JPY lagged. The Asia-Pacific calendar is busy but with second-tier indicators. Ashraf's Intermarket Insights remain in progress.

Its hard to believe that all it took to spark a 300-pip rally in EUR/USD was for Merkel and Sarkozy to promise a comprehensive package to stem the European crisis by the end of the month but thats exactly what happened. The euro and other risk assets made strong, steady climbs from the weekly open through the European close before fading just shy of 1.37 and consolidated with most of North American markets closed for holidays.

The pledge to deliver a plan overshadowed the breakup and nationalization of Belgian bank Dexia and dovish comments from the ECBs Nowotny, who said inflation has peaked and that slowing growth is alarming.

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The pound underperformed, in part due to comments from the BOEs Miles, who said Q4 growth could be close to flat.

Overall, it was a banner day for risk assets. The S&P 500 closed up 3.4% to 1194, which is slightly shy of the Sept. 26 high but above the 55-day moving average for the first time since July. Gold, silver and oil also climbed 2-3%.

Asia-Pacific Preview

At 2350 GMT, Japan releases current account data with a 0.51 trillion yen surplus expected, sliding from the month before. Perhaps the report most likely to move the market comes at 0030 GMT when Nationala Australian Bank delivers up-to-date business confidence data; there is no consensus but we may see a deterioration of the -8.0 prior reading.

The focus switches back to Japan at 0500 GMT with the release of the BOJ monthly report and household confidence data (exp: 37.2).