USD Consolidated Gains In Lackluster Session

Summary

The USD consolidated recent gains today, enduring a chopping session bereft of any market-moving news.

Headlines

IMF: Managing Director Dominique Strauss-Kahn said that the EUR isn't jeopardized and will still be around in five years. "I don't think the euro is jeopardized," Strauss-Kahn said. Still, "we are not out of the crisis yet," and Europe "needs a coordinated economic policy and we have not reached that level yet." Compared with some other parts of the world, "the U.S. situation is less certain," and we will need to see how the fourth quarter pans out," he said. 

EU: ECB President Jean-Claude Trichet reiterated that excessive and disorderly movements of foreign exchange rates must be avoided. "The euro area has a shared interest in a strong and stable international financial system, as excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability," Trichet wrote in a letter to a member of the European Parliament.

EU: German Chancellor Angela Merkel reiterated her opposition to proposals for joint euro-area bonds, saying the debate over steps to resolve the debt crisis should be conducted "quietly and in a goal-oriented fashion." Issuing joint bonds, as proposed this week by Luxembourg Prime Minister Jean-Claude Juncker, would in the first instance fail to "provide the right impulse economically," Merkel told reporters in Berlin today. "Secondly, in our assessment it's not at all compatible with current treaties" that govern the European Union.

EU: ECB Governing Council member Axel Weber said it is "in our interest to introduce a permanent crisis mechanism after the end of the crisis, which can, without undermining the European Union's no-bailout agreement, provide financial aid under strict conditions if the common currency area is in danger." Separately, Weber said that European leaders must take the "right decisions" to counter the region's debt crisis. While authorities had two years to "draw the lessons" from the financial crisis, they may not have the same time with the sovereign-debt crisis, Weber said. He also called for a mechanism that allows an orderly unwinding of the banks that are considered too big to fail.

EU: ECB Governing Council member Nout Wellink said only governments can tackle fiscal problems. "At the end of the day these problems are problems of governments. The moment solvency is involved it's a government problem. They have to solve the problem." Wellink said. He added that the ECB's primary mandate is to deliver price stability.

UK: Former Prime Minister Gordon Brown said that the EUR will face a "high noon" early next year because the Eurozone's problems are bigger than simply government debts, they also include structure and bank debts.

New Zealand: the RBNZ left its benchmark interest rate unchanged today at 3.0%, in line with consensus expectations.

Dow 11,372.48, +0.1%; NYMEX Crude Oil $88.57, -0.1%

The USD consolidated recent gains today, enduring a chopping session bereft of any market-moving news. The EUR/USD fell to a session low of 1.3180 by 4:10am EST from 1.3260, before trading back to 1.3255 by the close. At the same time, GBP/USD raliied as high as 1.5836 by 9:45am from an overnight low of 1.5759, before trading back to 1.5800 by the close. Separately, USD/JPY rallied to a high of 84.31 at 12:50pm from an overnight low of 83.46, before trading back to 84.00 by the close. The dollar-bloc was largely unchanged against the greenback, with USD/CAD falling as low as 1.0063 by 9:45am from an overnight high of 1.0141, before close at 1.0115 near last night's close of 1.0125. Global bourse were nominally mixed, with the Dow trading sideways throughout the session closing up 13 points on the day. Commodity prices were mixed with NYMEX crude oil benchmark off a trivial -0.1% from the day to close at $88.57/bbl.
(michael.woolfolk@bnymellon.com)

Flow Analysis:

Our iFlow FX indicators show the pace of net selling of the Euro has slowed amid Irish lawmakers passing an initial series of parliamentary votes on the EUR 6.0 bln 2011 budget in Dublin. Even so, there is uncertainty about another vote on the proposed social welfare reductions that will probably take place tomorrow after a parliamentary debate today. As we have been cautioning, the Euro remains on the back-foot and we have now seen the single currency having been net sold for thirteen consecutive trading sessions – indeed, risks remain, as reiterated by IMF Managing Director Dominique Strauss-Kahn in Geneva today when he said that "The situation in Europe remains troubling, and the future is more uncertain than ever." In another meeting in Athens yesterday, Mr. Strauss-Kahn had also been critical of the EU's "case-by-case method" for dealing with the sovereign debt crisis, arguing instead for a "comprehensive" solution.

Amongst other G-10 currencies, Sterling, the Swedish krona and the Canadian dollar are being modestly net bought. Meanwhile, sentiment on the New Zealand dollar remains cautious ahead of the central bank's meeting on Thursday, with consensus expectations looking for RBNZ Governor Alan Bollard to leave rates on hold and possibly lower growth forecasts amid weakening domestic demand and weather-affected farm production. Amongst emerging market currencies, our iFlow FX indicators show the Mexican peso continues to be in favor, not least due to strong buying of Mexican debt instruments as confirmed by our iFlow bond indicators as local 10-year yields having risen to their highest levels since July has attracted fresh buying interest. Elsewhere in the region, we are also seeing the Chilean peso remaining net bought.
(samarjit.shankar@bnymellon.com)