By Ilya Spivak, Currency Strategist Wed Nov 17 06:47:00 GMT 2010 
Key Overnight Developments
Australian, New Zealand Dollars Follow Stocks Lower on China Rate Hike Fears Euro, Pound Consolidate Ahead of EU FinMin Summit, Bank of England Minutes Fed’s Lockhart Says QE Not Intended to Monetize US Debt, Debase the Dollar Critical Levels The Euro and the British Pound were essentially unchanged in overnight trade, with prices consolidating NY-session losses in narrow ranges ahead of a hefty dollop of fundamental event risk on tap in European hours (see below). We remain short EURUSD and long USDJPY. Asia Session Highlights Westpac Leading Index (MoM) (SEP) DEWR Skilled Vacancies (MoM) (NOV) Fed's Dennis Lockhart Speaks on Economy The Australian and New Zealand Dollars underperformed in otherwise quiet overnight trade, sinking 0.2 percent apiece against the US Dollar as stocks declined amid lingering concerns about forthcoming Chinese efforts to cool growth in the East Asian giant after inflation hit a 2-year high, spurring fears of overheating. The MSCI Asia Pacific regional benchmark stock index sank 0.6 percent as traders reacted to yesterday’s comments from China’s Premier Wen Jiabao, who said the cabinet is drafting measures to stem price growth. Both currencies show a strong correlation with overall risk sentiment as their relatively high yields make them attractive carry trades. The Federal Reserve’s Dennis Lockhart took to the wires defending this month’s reboot of quantitative easing (QE), saying the policy will help the economy avoid the “danger zone” and reiterating that the central bank’s aim is not to monetize US debt or debase the Dollar. Lockhart added that the Fed is likely to complete the full $600 billion in asset purchases outlined earlier this month. Euro Session: What to Expect Average Weekly Earnings (3M/YoY) (SEP) Weekly Earnings Excluding Bonus (3M/YoY) (SEP) ILO Unemployment Rate (3M) (SEP) Euro-Zone Construction Output s.a. (MoM) (SEP) Euro-Zone Construction Output w.d.a. (YoY) (SEP) Italian Current Account (euros) (SEP) A meeting of Euro Zone finance ministers in Brussels takes the spotlight as jittery markets continue to monitor renewed sovereign risk turmoil on the currency bloc’s periphery. The most pressing issue on the table is that of Ireland. The country has argued vigorously that it doesn’t need a bail-out, saying all of its obligations are fully funded through mid-2011. However, the government is also on the hook for losses sustained by the ailing banking sector. This could prove dangerous very quickly considering Irish lenders are already tapping one fifth of all ECB lending to the region’s banks and have already 40 billion euros in fiscal assistance. Spain, Greece and Portugal – the other faces of the Euro Zone sovereign debt fiasco – are eager for Ireland to accept EU assistance and will put pressure on it to so, fearing that allowing the situation to fester longer will spur contagion fears and boost borrowing costs for their own funding efforts. Meanwhile, Germany continues to push for the creation of uniform sovereign bankruptcy procedures, thereby telegraphing that Euroland’s richest nation is less than thrilled to foot the bill for its spendthrift comrades and is willing to let them fail, albeit in an organized fashion. On balance, the most workable proposal seems to be to tap the European Financial Stability Facility (EFSF) for funds marked for a “restructuring” of the Irish banking sector that bolsters these institutions enough to be sold off to foreign buyers. Ideally, this would be done using just the 60 billion euros contributed to EFSF by the European Commission and the 250 billion provided by the IMF. This promises to deal with the issue while simultaneously allowing Ireland to save face by avoiding an outright “bailout” while side-stepping the politically tricky issue of having one EU member bail out another. Minutes from November’s Bank of England monetary policy meeting promise to further dissipate expectations that the central will follow the US Fed down the road of renewed quantitative easing. The release may not garner significant attention however considering traders have had ample opportunity to price in the current monetary policy landscape after policymakers unveiled an unexpectedly hawkish quarterly inflation report last week while the inflation rate ticked higher in October. On the other hand, UK Jobless Claims are expected to have added 6,000 in October, marking the third consecutive increase and the largest since January. While the Claimant Count – a proxy for the jobless rate – is expected to hold steady at 4.5 percent, a 15-month low set in June, signs of a deteriorating labor market may certainly raise questions about the need for monetary stimulus as the onset of the government’s ambitious debt-cutting program looms ever closer. For real time news and analysis, please visit http://www.dailyfx.com/real_time_news To receive future articles by email, please contact Ilya at ispivak@dailyfx.com
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Wed Nov 17 06:47:00 GMT 2010
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