It’s a Deal!

As expected, events in the Eurozone are driving currency market movements, amid high volatility. The Euro has surged against the major currencies, after European leaders reached an agreement that private-sector holders of Greek debt will take a voluntary 50% haircut. French President, Nicolas Sarkozy, indicated that the European Financial Stability Facility (EFSF) will be extended to $1.4 trillion and that the EU would be collaborating with the IMF, to seek additional sources for financing. Though Sterling strengthened against the US Dollar on higher risk appetite, news flow on growth continues to be weak. Yesterday, the Confederation of British Industry indicated that its index for business optimism declined to the lowest level in two and a half years in October, raising renewed concerns of a slowdown in the UK economy. We expect the Euro to trade higher against Sterling in the near term. We expect high volatility as there is still lack of clarity on how the Eurozone rescue plan will be delivered.

Pound Sterling – UK Markets

Sterling has weakened against the Euro, this morning, as concerns in the Eurozone eased, after European leaders announced measures to tackle the debt crisis. Meanwhile, Director, Markets, BoE, Paul Fisher, has indicated that expanding the monetary stimulus by £75 billion was the minimum amount required to shore up the shrinking UK economy. He further added that there is a “50-50” chance that the economy would contract in the fourth quarter. The CBI in its recent industrial trends survey revealed that manufacturers expect the output to fall over the next three months. Moreover, the general business sentiment in the manufacturing sector slipped to the weakest level since April 2009, thereby raising concerns over the health of the UK economy. With no major releases scheduled for today in the UK, investors are expected to tread cautiously in the near term. We expect Sterling to trade weak against the Euro in the near term.

US Dollar – US Markets

An accord on the haircut on the Greek debt for the private sector, and the European Union leaders’ plans to expand the region’s rescue fund, boosted risk appetite amongst investors, and has weakened the demand for the US Dollar. However, yesterday’s data indicating a more-than-expected rise in the U.S. durable goods order, excluding transportation, highlighting recovery in the nation’s economic growth, has eased speculation of further near term quantitative easing. The third quarter U.S. gross domestic product (GDP) data, scheduled today, is expected to provide more cues on how the United States economy is performing, with expectation for an improvement from the second quarter.

Euro – European Markets

The Euro has surged against Sterling and the US Dollar, this morning, after the European Union leaders and banks struck a deal on a 50% write down for private bondholders on their Greek debt, and boosted the rescue fund to €1.4 trillion. The details of the process to scale up the European Financial Stability Facility (EFSF) would be agreed upon in the next meeting in November 2011. European Union’s progress on bank recapitalization and a commitment from Italy to do more to reduce its debt, further boosted the Euro. Although the summit did not come up with a comprehensive solution, the leaders seem to have made significant progress towards stemming the contagion fears. Investors will be closely watching the German Consumer Price Index data and Eurozone’s business climate and consumer confidence data scheduled for release today.

Other Currencies – Highlights

The Kiwi Dollar has strengthened after the nation’s Reserve Bank Governor, Alan Bollard, kept intact expectations for a hike to the benchmark interest rate early next year. He stated that a “gradually increasing pressure on domestic resources will require future official cash rate increases.” The statement followed the central bank’s decision to maintain its benchmark rate unchanged at 2.5%. Additionally, positive news flow from the Eurozone lent support to most of the high yield currencies, including the Aussie and the Kiwi Dollar. We expect these currencies to maintain strength, as optimism over the deal is likely to persist in the near term.