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Risk appetite took a big hit in Asian trading as headlines from the G20 communiqué had traders paring back risk correlated trades. A US official’s statement seems to suggest that some type of agreement had been reached with China. While explicit levels on current account targets have been taken off the table, the headline that “G20 agrees to have a set of indicators for current account imbalances” points to some loose agreement. In addition, splashy headline such as “countries can intervene if FX is out of line with fundamentals” and “G20 accepts countries can intervene if FX moves are disorderly”, have been made. The USD made broad gains as the EURUSD dropped to 1.3575 while AUDUSD fell to 0.9825. Asian regional indexes were red across the board with the Shanghai composite leading the way down a whopping -5.16%. In addition, after this week, strong economic data markets are worried that further tightening moves by the PBoC are right around the corner.

While the final communiqué will provide a temporary diversion, we doubt it will be the game changer that some had anticipated. Overall it should reassure traders that protectionism should not be an issue, while moderate rebalancing of the global economy would be a unified effort.

Now it seems the shift from worries over the Fed QE2 program has now completely shifted to peripheral euro area sovereign debt concerns. Comments from European officials continued to hit the wires overnight, as yesterdays frenzied selling hit peripheral bond yields ( Ireland leading the way) was unnerving. While for the most part, concern over Europe was isolated in yields, we are now seeing a follow through in Money Markets. Irelands Prime Minster Cowen stated that the recent widening in yield spreads was caused by the ambiguity of the German proposal over making the sovereign rescue mechanism permeate.

German chancellor Angela Merkel didn’t calm investor’s nerves when she stated that any futures Greek style bailout should be placed heavily on private investors. Posted in todays FT she states, “Let me put it quite simply: in this regard there may be a contradiction between the interests of the financial world and the interests of the political world,” Ms Merkel said. “We cannot keep constantly explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people who have earned a lot of money from taking those risks.” Obviously she is refering to the EUs SDRM plan and these are words we need to remember. European commission President Barroso stated that the EU stood ready to assist Ireland, perhaps in an effort to calm the market.  

This morning Finance Ministers of France, Germany, Italy, Spain and the UK issued this statement regarding the proposed sovereign debt restructuring mechanism: “whatever the debate within the euro area about the future permanent crisis resolution mechanism, and the potential for private-sector involvement in that mechanism, we are clear that this does not apply to any outstanding debt and any programme under current instruments. Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements”.

The highlight today should be a string of individual country and Euro Area Q3 GDP data today. Markets are expecting some positive news with a euro zone GDP q/q rise of 0.5%. Given the growing pressures from peripheral Euro Area into risk correlated trades, a solid GDP figure has a greater ability to provide a short term correction in risk taking.

00:00 EUR G20 Summit 2010 in Seoul (prior day)
06:30 EUR FRA Q3 GDP – flash, +0.5% q/q exp; prior +0.7%.
07:00 EUR GER Q3 GDP – flash, +0.7% q/q, +3.7% y/y exp; prior +2.2%, +4.1%.
08:00 EUR ESP Oct HICP, +0.8% m/m, +2.2% y/y exp; prior unch, +2.1%.
09:00 EUR ITA Q3 GDP – flash, +0.3% q/q, +1.1% y/y exp; prior +0.5%, +1.3%.
10:00 EUR Q3 GDP – flash, +0.4% q/q, +1.9% y/y exp; prior +2.2%, +4.1%.
10:00 USD Sep ind production, +0.3% m/m, +7.1% y/y exp; prior +1.0%, +7.9%.
14:55 Nov U.Mich sentiment index – prelim, 70.0 exp; prior 67.7

The Risk Today: EurUsd As we discussed yesterday, 1.3700 would need to stay intact for the EURUSD bulls to have any hope of revisiting 1.4000. That hope was smashed as the pair easily traded through 1.3700 (20 Oct low) and more importantly major 1.3635 level which not only represents the 5 Oct low, but also the 38.2% fibonacci retracement of the rally from 1.2588 to 1.4281. From here expect minor support around 1.3570 then 1.3510. Initial supply will be located at 1.3670 then 1.3735 (horizontal support turned resistance).

UsdChf After climbing briefly above 0.9760 resistance yesterday (.9787 high) , USDCHF has pared back towards the 0.9695 support, and we note that a 1-week uptrend channel may be in play here. Over the medium-to long-term we still feel that Swiss fundamentals warrant a return to the 0.9540 level (first established on 18 Oct and re-tested on 5 Nov) and indeed the all-time low 0.9464 (seen on 14 Oct); but in order for us to build a strategy on that view, we’d really need to see this 1-week uptrend channel broken (lower edge currently exp at 0.9650). We expect pockets of supply to remain at 0.9799- 0.9805 (50-day moving average and 3 Nov high) and 0.9970 (1 Nov high).

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