A Big Week for the Eurozone: EFSF bond buying powers would take the pressure off the ECB

* Finance ministers discuss extension of EFSF
* EFSF bond buying powers would take the pressure off the ECB
* These discussion are central to the euro's performance this week
* Spain cancels public debt auction for Thursday, choosing a private
bond sale instead
* UK data could come into focus this week: CPI and unemployment

After experiencing its best weekly performance in more than 2 years
the euro is on the back-foot at the start of this week as the dollar
recovers some composure after losing 2.5 per cent on a broad-based
basis last week. The start of the week sees an important meeting of
the Eurozone's finance ministers, who are set to discuss changes to
the European Financial Stability Facility (EFSF). These changes,
first reported last week, include an increase to the size and scope
of the fund. This would include giving the fund the power to
directly purchase the debt of beleaguered members, a role which has
fallen to the ECB since the onset of the crisis last year. But this
is something the Bank seems keen to get rid of.

The market has been prepped that a final decision on a more permanent
resolution to the sovereign debt problem will not be imminent and may
not be agreed until 4 February at the meeting of Europe's heads of
state. However, a dearth of economic data due to a US public holiday
means that any headlines coming out of the meeting will be held up for
scrutiny by the market to determine how committed Europe's finance
leaders are towards finding a permanent solution to the crisis. It
seems more and more likely that the only logical solution to the
crisis will be closer economic and fiscal ties and a change to the
original EU Lisbon Treaty that insisted on the fiscal sovereignty of
nations and did not allow transfers from one member to support the
financial position of another. Germany's approval to these watershed
changes is the lynchpin necessary for a long-term solution to work; it
looks as if they will give their agreement, but only at the cost of
tougher austerity measures for the debt –ridden periphery.

Traders need to watch the headlines coming out of today's eco-fin
meeting closely as this was one factor that drove the euro higher last
week. Markets were cheered at the prospect of European leaders, at
last, seemingly moving toward a unified long-term solution to the
crisis. If the meetings this week fail to make headway then the
markets could lose faith in the will of member nations to sort out the
sovereign difficulties the currency bloc is facing and we could see a
sharp reversal in direction for Eurozone assets, including a dive
lower for the euro.

Elsewhere, the Aussie dollar is recovering some of Friday's losses
after China hiked the reserve requirement ratio for the first time
this year. It is also benefitting from a retreat in floodwaters in
Queensland. Interestingly, the latest data from the CFTC show that
traders still remain fairly long the Aussie dollar, although there was
a reduction in positions last week. This is positive and suggests that
the Aussie could continue its grind higher and leaves another shot at
parity a realistic scenario for the coming weeks.

The Canadian dollar remains fairly flat before tomorrow's Bank of
Canada interest rate announcement. The market expects the Bank to
leave rates on hold at 1 per cent, even though economic data has been
ticking up recently, due to the uncertain global economic environment.
Stock markets have had a fairly weak start, and even though oil
company BP jumped above 500p per share on news of a deal with Russian
state-controlled oil giant Rosneft, this hasn't pushed up the FTSE
100. This is partly due to the fall in BP's market capitalization as a
result of the Macondo oil spill, which has reduced its influence on
the index. It is currently 6.14% of the index, this compares with
HSBC, which makes up nearly 8 per cent.

Commodities are trading lower in line with a stronger dollar this
morning and gold has also fallen 0.5% during the European session.
It's a quiet data week in the US, which could leave the UK and Europe
centre stage. Spain has cancelled an auction for 20th Jan, instead
using a syndicated sale (private bond sale). But Germany, Netherlands
and Belgium will all tap the market for short-term debt later this
week. The UK has a hefty schedule of economic data releases. CPI is
released tomorrow and unemployment data on Wednesday. Also watch out
for the start of China's President Hu Jintao's visit to the US that
begins tomorrow.
Source: ActionForex.Com