EUR/USD Nov. 1 – Falls on Greek Referendum

EURUSD is free falling. The hangover from the EU Summit has intensified as the Greek Prime Minister announced a referendum to approve the recent EU deal. This gamble, alongside more signs of global slowdown, weigh heavily on the common currency, which already returned to the levels last seen before the previous summit.

Here’s a short update on fundamentals and what’s going on in the markets.

EUR/USD Fundamentals

14:00 US ISM Manufacturing PMI. Exp. 52.1 points. First hint towards the Non-Farm Payrolls. See how to trade this event with USD/JPY.
14:00 US Construction Spending. Exp. +0.4%.
14:00 US ISM Manufacturing Prices. Exp. 55.1 points.

* All times are GMT.


EUR/USD Sentiment

Greek Referendum: In a move that came as a shocker (although hinted in the past) Greece’s Prime Minister Papandeou announced that the recent EU Summit deal will be brought to the Greek public. This can delay implementation in the better scenario, and receive a NO in the more realistic scenario.
Partial Holiday: It’s “All Saints” Day in many European countries, hence no economic indicators and a slightly lower volume.
Global Slowdown: Chinese PMIs weren’t so convincing, and the sharp drop in British PMI. These join weak euro-zone figures published recently. The Australian rate cut, by itself a downwards sign, was accompanied with a weak sentiment.
EU Summit Doubts: After a very cheerful reception for the EU Summit results, the doubts begin to rise. This begins with no demand for a specific participation in the Greek haircut, continues with doubts about the willingness of China to really help, and the open question of CDS triggering.
Yen intervention fading: The Japanese authorities had enough after USD/JPY fell to 75.31 and made a sharp move in the pair, sending it as much as 400 pips higher before dropping a bit. This wild action sent EUR/USD down, and started the downfall. In the meantime, USD/JPY calmed down and EUR/USD continues on its own.
Italian bonds yields soaring: One of the stronger signs of disbelief comes from Italy. Berlusconi was forced to accept concessions, but they aren’t really huge. Until the leveraged EFSF comes into action, Italy suffers in its bond auctions and was forced to pay a dear price. The ECB, headed by Italian from Tuesday, still finds itself acting and buying bonds to lower their yields. This is a worrying sign. 10 year yields are currently 6.20% – as if the ECB never intervened…
US Situation Improving: The first read of GDP for the third quarter of 2011 came out at 2.5%. This was within expectations but much better than the previous quarters. While it triggered a strong risk rally, there’s still uncertainty about how the Federal Reserve will digest this. They might raise forecasts, but some expect them to act in the meeting this Wednesday.

Forex Most Important Events of the Week – October 24-28

The US dollar fell for another week as the panic seen early in the money continues to unwind. Will this weakness come to an end? The EU economic summit, rate decisions in Canada, Japan and New Zealand and US housing and employment figures are the major events this week. Here is an outlook on the main market-movers awaiting us.

Last week The Philly Fed Manufacturing Index scored +8.7 points unlike predictions for a negative reading of-9, a good sign of recovery after the serious 30.7 drop in September. Nevertheless, all eyes are turned to Europe and the EU Summit this Sunday and a follow up later on.

Important decisions are about to take place concerning the huge debt crisis affecting worldwide financial markets. Options are becoming limited.

Let’s Start

EU Economic Summit: Sunday. The leaders of the Euro-zone will try to reach an agreement about the usage of the EFSF bailout fund, recapitalization of the banks and the size of the Greek haircut. Negotiations are stuck and a second summit on Wednesday has a better chance of reaching an agreement on something.
Canadian rate decision: Tuesday, 14:00. The BOC decided to maintain rates at 1.25% for the seventh time however hinted strongly about a possible rate hike in the next rate decision meeting. The bank also announced that monetary stimulus will be stopped in case the growth continues in order to achieve a 2.0% inflation rate. No change is forecasted.
US CB Consumer Confidence: Tuesday, 14:00. The Conference Board Consumer Confidence Index increased in September, less than predicted, to 45.4 from45.2 in August while a rise to 46.2 was predicted. Consumers are worried about current conditions which weakens consumer spending. A rise to 46.3 is predicted.
US Core Durable Goods Orders: Wednesday, 12:30. U.S. companies’ orders of durable goods, excluding transportation products, dropped by 0.1% in August contrary to predictions of 0.1% gain. This important spending indicator reflects the weakness in theUS economy. An increase of 0.6% is predicted now.
US New Home Sales: Wednesday, 14:00.US new home sales dropped by 2.3% in August in line with predictions reaching 295,000 units after302,000 in the previous month. New home prices are still considerably higher than existing home prices taking into account the foreclosure deals tempting the US home buyer. This situation is expected to weigh on future new home sales. A rise to 303,000 units is expected now.
NZ rate decision, Wednesday, 20:00.New Zealand’s central bank decided to keep rates at 2.50% in light of increasing global economic risks despite a positive recovery process in NZ domestic economy fearing tough conditions abroad will jeopardize exports. Rate are expected to be maintained at 2.50%.
Japanese rate decision: Thursday. The Bank of Japan maintained its overnight call rate between 0 to 0.1% by a unanimous vote and continues its monetary easing to achieve price stability. No change in rates is forecasted.
US Advance GDP: Thursday, 12:30. The earliest indicator of US economic growth showed a 1.3% climb in the second quarter of 2011 from 0.4% expansion in the previous quarter. This reading was somewhat below the 1.7% increase predicted. This rise is credited to the increase in exports and foreign investments. A growth of 2.3% is expected now.
US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment benefits dropped last week to 403,000 indicating improvement in the job market conditions following409,000 in the preceding week. Nevertheless economists predicted claims will drop to401,000. A small rise to 405,000 is predicted.
US Pending Home Sales: Thursday, 14:00. Pending sales of existing U.S.homes dropped 1.2% in August due to Hurricane Irene, stopping sales in the Northeast. Before the Hurricane, economists predicted 1.8% rise. An increase of 0.2% is expected now.

*All times are GMT. That’s it for the major events this week. Stay tuned for coverage on specific currencies.

The scenario of an orderly yet non-elegant Greek default in the first week of November is getting closer and becoming more real.

If you are interested in an alternative way of trading currencies, check out the weekly binary options setups, including EUR/USD, GBP/JPY and more.

EURUSD 150 Pips Rally - Why?

Investors are probably scratching their heads right now wondering how risk appetite can be so strong this morning after European officials rejected all of yesterday's rumors about increasing the European Financial Stability Facility (EFSF) and using the European Investment Bank (EIB) to bail the euro out. The reason why the mood continues to improve is because regardless of the denials by European nations that a deal is in the works, the market realizes that if the Europeans are serious about ending their sovereign debt crisis once and for all - and it certainly sounds like they are - they need to announce a major bailout plan in the very near future. It may not take the form of what the U.K. Telegraph or CNBC proposes, but it needs to be equally large and ambitious. In other words, if the market wants a European style TARP, policymakers need to meet or exceed their expectations and based upon recent comments from EU officials, something is in the works whether they admit to it or not.


Optimistic About Greek Vote

At the same time, investors are also optimistic about today's vote in Greece. The Greek Parliament is widely expected to approve an unpopular increase in property tax to show their resolve in slashing their deficit. The Prime Minister even pledged to make a "superhuman effort" to make their debt reduction program a success. Buyers of Italian and Spanish bonds demanded a higher yield at today's auction but the number of bids to the number bonds available for purchase (bid to cover ratio) was strong.

Quarter End Rebalancing Needs

The quarter is also coming to an end and in order to rebalance their portfolios following the sharp sell-off in equities in Q3, money managers will need to buy stocks and high yielding currencies. To clarify further for our new readers, imagine that you are a global money manager with 50 percent of your portfolio in US equities and 50 percent of your portfolio in the German stocks. In the third quarter, US stocks lost approximately 12 percent of their value while German stocks declined by approximately 25 percent. Adjusting for the 6 percent decline in the euro in the third quarter and the drop in the value of German stocks is closer to 30 percent. In order to rebalance the portfolio, you will need to buy both U.S. and German stocks but more euros will need to be bought than dollars.


US Confidence Rebounds but Remains Near 2 Yr Low

Across the Atlantic, U.S. consumer confidence rose slightly in the month of September according to Conference Board. Although this may be a sign that confidence is stabilizing, before getting too excited, it is important to realize that consumer sentiment remains just a hair above its 2 year low. Manufacturing activity in the Richmond region also contracted at a slower pace which is in line with the rebound seen in other parts of the nation. Stronger U.S. numbers should help to sustain risk appetite in the financial markets.