Daily Report: Euro Firm As Officials' Pledges Continue

The dollar is mildly high today as markets are digesting last week's risk appetite moves. Asian equities are broadly higher, following the rally in US stocks on Friday, with the Nikkei up 60 pts at the time of writing. The euro is back below 1.23 level for moment but remains firmly supported by expectations that ECB would act to bring down Spanish and Italian bond yields. Luxemburg Prime Minister Juncker was quoted in a newspaper over the weekend that EFSF and eurozone leaders will act together with ECB to stabilize the euro. Juncker pledged that officials must "clearly show through all means possible that we are firm on assuring the stability of the monetary union." Current EFSF has around EUR 200b left and is allowed to buy public debt on secondary markets. The fund could have enough impact on the bond markets. Italy will auction EUR 3-5.5b in bonds today, mostly 5- and 10-years debt.

After his bold comments, markets are all expecting ECB president Draghi to deliver something in this week's regular EB meeting. But Draghi will need to overcome Bundesbank's first as he's preparing to meet with Bundesbank President Weidmann today. It's clear that Draghi viewed the skyrocketed Spanish and Italian yield as “hampering the functioning of the monetary policy transmission channel.” And that raised the prospect of ECB restarting the Securities Markets Program of bond buying. However, just a day after Draghi's pledge, Bundesbank reiterated its opposition and said again that ECB bond buying is "problematic." So comments from Draghi and Weidmann after the meeting will be important.

CFTC data as of July 24 showed that speculators have pulled back euro shorts from 167k contracts to 155k even though EUR/USD has been dropping persistently since the start of the month. That's inline with EUR/USD's bottoming at 1.2042 on the same day and had a sharp turnaround. Meanwhile, note that yen longs more than doubled, from 11k to 25k contracts and hit the highest level since February. Aussie long also jumped from 14k to 26k contracts, highest since May.

On the data front, New Zealand building permits rose 5.7% mom in June, below expectation of 7.3% mom. Japan industrial production dropped -0.1% mom in June, below expectation of 1.5% mom. UK mortgage approvals, M4 money supply and CBI reported sales will be released in European session, along with eurozone confidence indicators.