Choppy Consolidation: Flavor of the Day

The major currencies are in relatively narrow ranges in choppy trading ahead of tomorrow's EU summits and German parliament vote. The major foreign currencies remain firm as the North American session is about to begin.

Most attention is on the EU and euro zone summit tomorrow, but the German Bundestag vote is very important as well. The vote is on the new EFSF reform. Many of Merkel's CDU members may vote against it, according to Der Spiegel. The Social Democrats and Greens are reportedly undecided. They are more pro-Europe than the CDU, but the details of the amendments have not been aired yet.

With the euro near its highs, having recovered about 6.4% this month and retracing nearly 61.8% of the September slide, a low risk sale opportunity may be at hand. Key resistance is seen in the $1.4015-40 area. Moreover, the S&P 500 is also approaching important resistance in the 1260-1275 area, which corresponds to the old neckline of a topping pattern and the 200-day moving average. Given the record (since at least the early 1990s) correlation between the euro and the S&P 500, the nearby resistance fits in with the more cautious outlook for the euro. Initial euro support is now seen near $1.3850.

There is another key political development that foreign exchange traders should be aware of. The Greek finance minister, in an apparently little noticed warning yesterday indicated that the new program that emerges from the Wed summit will require a super-majority of the Greek parliament. This is 180 votes of the 300 member house. The ruling Socialists have 153 seats. The opposition wants the government to collapse and have new elections, in which the polls suggest the Socialists will be voted out of office. There are some small splinter non-aligned parties, but they do not have the numbers.

Those governments that took aid have collapsed (Ireland and Portugal). Greece is the exception to the rule. However, Fin Min Venizelos comments warn that the Greek government may collapse shortly. This represents a new wild card into the mix that few seem to realize...yet.

The Canadian dollar is flirting with parity ahead of the Bank of Canada meeting. The bank is unlikely to move and the meeting itself may be a non-event, but tomorrow's monetary policy statement may be more important, especially given the relatively better US and Canadian dollar reported recently.

There is a trendline, drawn off of the July 26 US dollar near CAD0.9400m and the Sept 19 low near CAD0.9766. It comes in today near CAD0.9980. A break of that trendline, coming as it does, after the 50% retracement of the US dollar rally off those July lows has given way (near CAD1.0033), would point to the next target near CAD0.9885 and then CAD0.9810, the 200-day moving average.