Euro Threatened Ahead of Meeting on Euro Zone Rule Changes

The Euro and the British Pound were little changed in overnight trade, with the single currency oscillating below the 1.35 to the US Dollar while sterling tracked sideways in a well-defined range above the 1.58 figure. We remain flat EURUSD and GBPUSD. UK House Prices fell 0.4 percent in September according to a survey from property market researcher Hometrack Ltd, marking the third consecutive decline and the largest one in 18 months. In a statement accompanying the release, Hometrack’s research director Richard Donnell chalked up recent weakness to “growing concerns over the economic outlook and public-spendingcuts,” adding that current trends are likely to persist “well into 2011”. However, Donnell added that the pace of price declines is likely to be contained as falling demand is coupled with a moderation in the volume of new supply coming to the market.
Japan’s Trade Balance surplus shrank to 103.2 billion yen in August as export growth slowed for the sixth consecutive month, adding 15.8 percent from the previous year to post the smallest increase in eight months. Shipments to China and the US – Japan’s top two trading partners that collectively account for a whopping 35 percent of the island nation’s overseas sales – increased the least since November and December 2009, respectively. The outcome hints that Japan’s export-driven recovery on the back of global stimulus efforts in the aftermath of the 2008 Great Recession is faltering, prodding policymakers to step up efforts to drive down the still-buoyant Japanese Yen after intervening into currency markets for the first time since 2004 earlier this month and allegedly stepping in again last week.
The economic calendar is conspicuously bare in European hours, hinting risk sentiment is likely to be in focus. Shares soared overnight, with the MSCI Asia Pacific regional benchmark index adding 1.2 percent to trade at a five-month high, while S&P 500 stock index futures are up 0.4 percent, pointing toward ample support behind risk appetite to start the trading week.
The implications of such an environment for major currency pairs are uneven however, with the relationship between the US Dollar and stock prices no longer as one-sided as it had been until recent weeks. Indeed, while the Australian, Canadian and New Zealand Dollars’ values against their US counterpart remain closely correlated with the MSCI World Stock index, the same cannot be said of the Euro, Pound or Yen, where the relationship has materially faded (each for their own reasons).
For the Euro, this means the spotlight will likely fall on the outcome of a meeting between European Council President Herman Von Rompuy and Euro Zone finance ministers, with the group set to discuss proposed changes to the rules governing the currency bloc in the aftermath of this year’s sovereign risk flare-up on the region’s southern periphery. The outcome may prove critical, with the markets’ confidence in the single currency as a viable alternative to the US Dollar seemingly in the balance. The summit may also prove significant for the Pound in that it may encourage traders to shift capital out of Euro-denominated assets in favor of European alternatives including sterling, first as a precautionary measure ahead of the summit and potentially in its aftermath as well. Finally, for the Yen, the landscape remains clouded amid fears of renewed intervention from Japanese authorities, particularly in the aftermath of today’s Trade Balance figures (see above).