Mixed signs of progress and discord ahead of this weekends EU summit led to jerky trading

Mixed signs of progress and discord ahead of this weekends EU summit led to jerky trading Thursday. CHF and CAD were the top performers while JPY and USD lagged. The focus will remain strictly on Europe in the upcoming session despite planned speeches from US and Asian policymakers.

The earlier euphoria from the announcement of the EFSF guidelines faded in early US trading, pulling EUR/USD from a session high of 1.3842 down to the session low of 1.3657. The lows came on reports that a deal on Greece and EFSF leverage were highly unlikely at the Oct. 23 summit. The crux of the problem appears to be German opposition to the French proposal to turn the EFSF into a bank that can borrow from the ECB.

Sentiment rebounded on signs that a second summit, likely Tues or Wed, is in the works. Sarkozy released a statement saying leaders plan to deliver a comprehensive and ambitious global response at the second meeting that will include new forms of implementation of the EFSF and a European bank capital plan.

Merkel cancelled a planned speech to German parliament tomorrow because she has no plan to present.

If Merkel can bring German politicians on board, the French plan is likely to go forward and the euro will rally. If there is no agreement, or France is forced into a compromise, the euro will fall.

Italian PM Burlusconi undoubted left some members of his inner circle disgruntled after he nominated Ignazio Visco to lead the Bank of Italy once Mario Draghi takes the helm at the ECB on Nov. 1. The FT reported that Burlusconi changed his mind twice in the 24 hours before the decision.

Earlier reports suggested ECB executive board member Bini-Smaghi had won the nomination. Instead, this move places 3 Italians on the ECB governing council and France -- left with a single member on the 23-member council -- is said to be upset.

Overlooked in the European drama was the Philly Fed. The manufacturing index posted its largest one-month jump in 30 years, climbing to +8.7 from -17.5. The S&P 500 gained 0.5% to 1215.

Asia-Pacific Preview

The calendar features comments from the Feds Kocherlakota at 2345 GMT. At 0030, Australia releases import and export prices. A 3.7% export price rise is expected in Q3 compared to +6.0% in prior quarter. Import expected up 1.0% vs prior +0.8%. Comments from Azumi are expected in early Japanese trading and a speech from Shirakawa is planned for 0635 GMT.