Euro Climbs on Larger Bailout Prospects

The euro opened modestly higher on a report of a plan to boost Europe's bailout fund. A Japanese official played down the possibility of a Swiss-style peg. Fridays CFTC report showed the net USD position at the most bullish in more than a year. The trades from Friday's Premium Intermarket Insights have been triggered according to the latest strategy. Premium members must closely watch that oil chart from Friday's piece.

EUR/USD jumped to 1.3525 from Friday's closing level of 1.3470. The gains were spurred by a report in the Telegraph outlining a plan to end the crisis in Europe. First, the current 440B euro EFSF would be leveraged to 1 or 2 trillion by guaranteeing losses. Second, European banks will be recapitalized with many tens of billions of euros. The article also says Germany is pushing for a managed Greek default including a haircut as large as 50% with the country remaining in the eurozone. According to the article, the plan will be ready before late November G20 meetings.

Speculation about Japan following in the footsteps of the SNB and introducing a currency peg were dashed by comments from a Ministry of Finance official who told Reuters that IS NOT AN OPTION because it would involve abandoning monetary policy. His comments suggest that policymakers are focused on combating deflation as a means of devaluing the yen and stimulating the economy. USD/JPY opened the week roughly unchanged at 76.59.

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NZD is the laggard in early trading, falling to the lowest since April. The declines appear to be primarily driven by risk aversion but August trade balance data released before the market open is also weighing. A deficit was reported at $641M compared to the $315M expected and $129M prior. Exports increased but rising imports, especially energy, caused the defict.

Fridays CFTC report (which tracks data through the close on Tuesday) is of limited value because of the extreme market moves that followed the FOMC but the trend toward USD is clearly accelerating. The USD net long grew THE MOST SINCE JUNE 2010 as GBP shorts more than doubled and EUR shorts increased 46%. The yen was the only major currency to make headway against the USD as the net long JPY expanded by a quarter. The market remained long AUD and NZD heading into the FOMC and that might explain the swift falls in both since Wednesdays decision.