Dollar Consolidates Wednesday's Gains

The EU Summit begins shortly. Out of the cacophony of voices will come some agreements, principally the modifications of the Lisbon Treaty, the closest thing to a constitution that Europe may have for quite some time, that will enshrine the European Stabilization Mechanism--the successor of the EFSF. This may include an agreement on collective action clauses.

German Chancellor Merkel was sharply criticized by political opposition in Parliament on grounds of not being supportive enough of Europe. SPD leadership is clearly more supportive of initiatives like a collective bond than is the CDU. This and the need for an agreement could see politicians do what politicians do and kick the can of controversial issues down the road. There is unlikely to be agreements on collective bonds, or increasing the guarantees of the EFSF,or having the EFSF purchase bonds. There may be agreement on new funding for the ECB. This year will finish without a clear and convincing strategy to address the debt crisis which will be a major force into next year.

The US dollar is consolidating yesterday's gains. The market appears to have moved into holiday mode and this is limiting the action. At the same time, it means some "important" levels may be breached without meaning very much, like the JPY84.40 level yesterday. Although I remain bearish toward the euro, I want to sell into bounces rather than on downside breaks. Potential today to $1.3280-$1.3300.

There have been several events that will make more talking points but few fresh trading incentives:

1. S&P upgraded China's sovereign rating to AA- and stable outlook, as well as four public state-owned financial firms. Hong Kong also upgraded.

2. Euro zone flash PMI manufacturing, lifted by a booming Germany, improved, but services were soft. Fiscal tightening is around the corner. Growth prospects for the euro zone next year are not very bright at about 1.5% forecasts from both the EC and ECB.

3. SNB left policy alone and warned that it would take "necessary steps" to prevent Swiss franc appreciation. The European debt crisis is the main driver of the Swiss franc. Even though the euro fell to record lows against the Swiss franc yesterday, the downside still beckons. Sell into euro bounces in am thinking now CHF1.2880-CHF1.2900 area.

4. UK retail sales were largely in line with expectations but the upward revision to Oct's data helped lift the overall tone. Firm retail sales however are seen as borrowing from next year as consumers try to get in front of the VAT increase. Meanwhile BOE's Quarterly Inflation report showed expectations moved higher--Oct 3.9% from 3.4%--the highest since Aug 08. Although Posen insists the he is not worried about inflation, he is unlikely to find many converts among the MPC. I like euro sterling lower.