Fundamental Headlines

•EU to Start Rescue Fund Next Month, Press Greece –Bloomberg

•Credit Suisse Asked to Hand over U.S. Client Data –Reuters

•ECB: Debt Crisis Doesn’t Threaten Euro –WSJ

•Greece Expected to Name Papademos Prime Minister –WSJ

•Key Berlusconi Ally Removes Support –WSJ

European Session Summary

Markets were relatively quiet in the overnight as the major currencies were relatively unchanged across the board headed into trading in New York. Throughout Asia, following a slew of disappointing data out of Australia, higher yielding currencies and risk-correlated assets sold off in preparation of a potentially tumultuous day in Europe: the new Greek government should is expected to come to power while embattled Italian Prime Minister Silvio Berlusconi is set to face another vote of confidence – he has survived over fifty to date.

Within minutes of European trading opening, however, the tone changed, as it appears that European market participants were confident that both political situations in Greece and Italy would yield the best desired results for holding the Euro-zone together. In my opinion, those results would be Lucas Papademos being installed as the new Greek Prime Minister and Berlusconi losing control of power. Papademos comes from an academic background, having a degree in physics from the Massachusetts of Technology, as well as a master’s degree in electrical engineering and a doctorate in economics; he is cut from the same cloth as many current Federal Reserve policy officials. In fact, Papademos has served with the Federal Reserve, the European Central Bank and the Bank of Greece – he is clearly the candidate that will blindly implement supranational European demands.

Across the Ionian Sea, the potential change of government in Italy is also likely to stir prop risk-appetite in the hours ahead. The Italian budget vote and thus vote of confidence is scheduled for 16:00 GMT, or 11:00 EST. While markets are looking for clarity on whether or not Berlusconi will remain in power and accordingly what reforms will be enacted to prevent contagion from spreading to Italy at a quicker pace, the ultimate bullish outcome for investor sentiment in the near-term and the health of the Euro-zone in the medium-term would be for Berlusconi to be removed from power. The weak reforms he has pushed through so far have done little to solve any of the problems plaguing Italy, and after fifty-something confidence votes, this should be his last one. If not, Italy will be sucked into the Grecian vortex that is a collapsing bond market.

EUR/USD 1-minute Chart: November 8, 2011

Charts created usingStrategy Trader– Prepared by Christopher Vecchio

Regardless of the potential outcomes, market participants are betting on the most bullish result, with higher yielding currencies net higher against the U.S. Dollar from the European session open to the U.S. session open, at the time this report was written. The best performing currency on the day was actually the Swiss Franc, up just over 0.5 percent against the U.S. Dollar after Swiss National Bank Vice-President Thomas Jordan – the man who hinted at the currency peg in early August – said that the interventions to weaken the Franc were not and are not intended to help Switzerland gain export advantage.

Should the scenarios outlined above play out as markets are signaling, there should be a brief rally to risk for at least today. If Berlusconi retains power – a possibility given his ability to convince Italian parliamentarians to keep the faith despite his obvious shortcomings – markets are likely to enter a very sharp sell-off in the hours afterwards. Any scenario in which Berlusconi holds onto power is bearish for higher yielding currencies and risk-correlated assets, specifically the Australian Dollar and the Euro, and bullish for the U.S. Dollar.

24-Hour Price Action

Key Levels: 13:25 GMT

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is relatively unchanged, trading at 9718.90, at the time this report was written, after opening at 9720.23. The index has traded mostly higher, with the high at 9744.86 and the low at 9710.61.

--- Written by Christopher Vecchio, Currency Analyst

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