EUR/USD
After rallying in Asian trading on Monday, the Euro continued to advance during the European session and peaked near 1.3680 with the strongest 1-day gain for 12 months.
Following German Chancellor Merkel and French president Sarkozy’s meeting on Sunday, there was further optimism that Euro-zone leaders could re-capitalise the banking sector and ease the Euro-zone debt crisis. This mood of optimism was sustained despite the lack of detail in the plans.
There were a series of worrying developments during the day, but this also did not have a major impact on the Euro. There was further uncertainty surrounding the Slovakia EFSF vote due on Tuesday. One of the four coalition partners maintained its opposition to the bill, although markets anticipated either that the party would back-down at the last minute or that the bill would be approved with opposition support even if this resulted in a government collapse.
The EU Commission also announced that the Summit originally scheduled for October 17th would be delayed by six days to give leaders more time to finalise plans. There was also speculation that Spain would miss its 2011 budget targets by at least 1% of GDP. The Troika announced that it had concluded its talks within Greece and an announcement on compliance may be made on Tuesday while there was further speculation that Germany was pushing for a hard Greek default as a condition for providing increased financial support.
There was a slight easing of financial strains as the Euribor-OIS spread narrowed during the day. In contrast, dollar Libor rates continued to increase slowly and there was also an increase in deposits held at the ECB to a record level which suggested that there was still a lack of underlying trust in the banking sector.
North American trading was inevitably very subdued given a US Market Holiday with the Euro drifting slightly weaker as short covering faded.
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Yen
The dollar and yen were again trapped within very narrow ranges during Monday with some US support on dips towards the 76.50 area. Both currencies had a weaker tone on the crosses as the Euro pushed to 3-week highs near 105.
An underlying improvement in risk appetite curbed defensive demand for the yen, especially with the Australian dollar making further headway. There were still signs of underlying caution as Euro-zone fears persisted.
There was a small improvement in consumer confidence for September and the Bank of Japan monthly report was slightly more optimistic over developments while continuing to promise monetary support.
Sterling
Sterling maintained a firm tone against the dollar on Monday and pushed to highs near the 1.57 level as dips to below 1.56 found support. Sterling was generally on the defensive against the Euro with losses to the 0.8730 area before a partial recovery as the technical picture was less favourable.
The UK currency benefitted from optimism that stresses within the Euro-zone banking sector could be contained which would also lessen threats to the UK financial sector.
There was still a high degree of pessimism surrounding the domestic economy as Bank of England MPC members looked to defend the expansion of quantitative easing and there were no major data releases during Monday.
The latest BRC retail sales report recorded a 0.3% like-for-like increase in sales while the RICS index was unchanged at -23% which did not suggest a major trend change within the economy as Sterling hit resistance above 1.5650 against the dollar.
Swiss franc
The Euro was unable to sustain a position above the 1.24 level against the franc during Monday and dipped to lows near 1.23 before finding support. The dollar was subjected to heavy selling pressure and dipped to one-week lows near 0.90 before a limited correction.
There was some disappointment that the National Bank had not increased the minimum Euro level which triggered some profit taking, although there was still speculation that a move was in the pipeline over the next few weeks which curbed aggressive franc buying.
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Australian dollar
The Australian dollar found support below 0.9850 against the US currency during Monday and pushed higher during the day with a brief move to above parity. Underlying risk appetite improved which provided important support for the Australian dollar as long US positions were also unwound.
There was still speculation that deteriorating economic growth conditions would trigger a cut in Reserve Bank interest rates. The latest NAB business confidence index improved to -2 from -9 previously which provided some relief. The Australian dollar was blocked close to parity, but maintained a solid tone in Asia on Tuesday.
