A vacation allows for one to take a step back from the grind of the markets while taking a look at the larger picture. The October bounce in the values of the EUR and the S&P 500 look positive. Though a solution to the European fiscal difficulties remains elusive, a coordinated resolution from the October 23rd euro zone summit could help to sustain the recent bounce higher in the EUR and other risky assets.
In early Asian trading China posted lower than expected GDP at 9.1% on forecasts of a 9.2% increase. While it is a sharp drop off from the previous release of 9.5% the Q3 GDP data strengthens the soft landing theory for the Chinese economy, the engine of the world's economic growth.
French bond spreads have continued to move higher with a potential negative outlook by Moody's if costs rise for bank bailouts or additional Greek bailout funds are needed. A loss of France's top credit rating would have knock on effects for the EFSF as the program which would likely lose its AAA rating in toe France is the second largest contributor to the EFSF behind Germany. As such spreads between French and German 10-year bonds have climbed to a 16-year high. Both the German ZEW and the European ZEW economic sentiment surveys were weaker than expected which has contributed to USD strength going into the North American open. Market participants are building expectations for a bit of closure coming from the October 23rd euro zone summit with a possible write down of Greek debt in the range of 50-60%, the potential to leverage EFSF funds, and bank recapitalization.
CFTC data ending on October 11th shows EUR shorts have decreased their positioning and the potential remains for additional short covering should the news flow turn EUR positive .
US monetary policy may also prove to be USD negative with potential for QE3 but I will save that discussion for later with additional entries in the forex blog. Given the fundamental news flow from today's Chinese GDP data, expectations of some sort of agreement to be hashed out in Europe on October 23rd, and market positioning, the EUR could be poised to move higher. Initial resistance for the EUR/USD is found at the weekly high which coincides with the 50-day moving average at 1.3910 and a retracement target at 1.4015. The previously broken trend line from May 2010 beckons as resistance at 1.4175. Should more downside price action be seen in the EUR/USD pair, then the 20-day moving average could come into play at 1.3550.