Intraday Market Thoughts

EUR Rebounds on Looming Treaty Deal

by Patrik Urban
Dec 9, 2011 13:06

Eurozone members to sign a new treaty; ECB weekly bond purchases capped at EUR 20 bln; Bundesbank open to IMF loans; UK producer inflation slowing; UK trade deficit narrows at the fastest pace. Market turns to US and Canadian trade deficit and UoM consumer confidence.

USD weakens across the board as EU summit progresses and risk appetite returns to the market. The relative strength winners are GBP, EUR and NZD. Major European equity indices show about 0.5% to 1% gains.

All 17 members of the Eurozone and 23 out of 27 members of the European Union agreed to a new treaty that assures deeper integration and stricter fiscal rules. The UK did not sign the proposed amendments to the EU treaty while three other EU members are still considering participation. Chancellor Merkel said that this new treaty would become the foundation of a fiscal and stability union. EURUSD reached 1.3430 after it fell to 1.3282 earlier during the session.

One factor that significantly contributed to the improving sentiment was a report published by Dow Jones that said that the BundesBank was "fundamentally open" to bilateral loans to the IMF. The loans could not be marked for the Eurozone but as crisis loans.

Also noteworthy was a report that the ECB purchases of sovereign bonds would be capped at EUR 20 bln per week. Italian 10 year yield jumped back above 7% and the German-Italian spread widened to over 5%.

In the UK, PPI input prices rose 13.4% in November y/y which is lower from previous 14.3% while output prices rose 5.4% y/y down from October's 5.7% confirming that inflation pressure is easing. UK trade deficit narrowed at the fastest pace on record in October to GBP -7.6 bln from previous GBP -10.2 bln as exports soared which could help to at least partially offset declines in manufacturing, industrial and construction output in Q4 GDP calculation. October construction output declined sharply -2.5% m/m and +2.7 y/y. GBPUSD trades firmly above 1.57.

The NY session starts at 8:30 am ET with a trade deficit that is expected to widen slightly to USD -44 bln in October from previous USD -43.1 bln. Preliminary December UOM consumer confidence due at 9:55 am ET is seen higher at 65.8 from previous 64.1.

Canadian data will include trade balance due at 8:30 am that is anticipated to show a surplus of CAD 0.7 bln in October, somewhat lower compared to September's CAD 1.2 bln. Labor productivity which is due at the same time should grow 0.4% in Q3 after -0.9% contraction in Q2.

ES, Gold, US crude, USDCAD and silver shorts remain in progress. Oil shorts missed target by 5 cents, while all EURUSD shorts are done. Direct access here: Non Subscribers can click here:


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