Euro tries to regain altitude but fails

More John J Hardy, yesterday09 December 2011 Non-Independent Investment Research The EU summit was a downer - no doubt about it. And the subsequent boost to the EURUSD from an unrelated story on the PBOC’s plans to invest a few hundred billion dollars in the US and EU proved ephemeral.

Our previous comments on the outcome of the EU summit both here (my earlier FX update) and here (Chief Economist Jakobsen’s commentary) make our position fairly clear. Since my early comments, it has become clear that not only the UK and Hungary of the EU-27, but also Sweden and the Czech Republic, will sit out the negotiations on this new treaty.

Somewhat oddly, but perhaps not so surprisingly given the frantic zigging and sagging on headlines of late, the market went more than a bit mental when it saw the Reuters story that the PBOC is planning a $300 billion investment vehicle that will invest in European and US assets to increase returns on its foreign exchange reserves. The timing of the article made it appear perhaps that it had something to do with the Euro Zone’s new commitment to give EUR 200 billion to the IMF, but on a closer look, it is clear from the article that this investment vehicle has been planned for some time and details were less than light on the instruments the vehicle would invest in.

Another key point in the wake of today’s summit centered on the ESM: in addition to the agreement to possibly  remove the cap on its size, a new principle of only needing a “qualified majority” to pass changes and avoid decisions being held up by only one nation rather than the normal insistence in unanimity had Finland protesting strongly. 

Odds and ends
The UK Oct. Trade Balance today was one for the ages, with a sudden and massive reduction in the trade deficit from record figures in September (revised down to almost GBP -10.2 billion, while October saw -7.5 billion, the smallest trade deficit since April of this year. There was no proper explanation for the move other than reports of strong export figures. But considering the gathering weakness in the Euro Zone economy, that one is a head scratcher. Let’s see what the next two data points show. It is important for the long term sterling picture that the current account imbalance improves.

In North America, the contrasting fortunes of the Canadian and US October Trade Balance levels helped to push USDCAD back higher again. The US number showed the smallest trade deficit all year (by a very slim margin), while the Canadian number slipped back into negative territory once again after showing a promising jump to a surplus in September.

Chart: USDCAD
USDCAD had an impressive outside day yesterday, with that day’s range engulfing the range of the previous five days. Today saw marginal further gains. Interesting to note that the pair has crossed back above the 55-day moving average, though it is still well within the shadow of the previous sell-off and needs to regain perhaps 1.0400