EUR/USD Hit Two-Year Low On ESM Delay

Euro dipped to another two year low against dollar after Germany's Constitutional Court delayed its decision on Eurozone's permanent bailout fund ESM. While the German's parliament ratified legislation on ESM back in June with overwhelming majority, lawsuits from citizens put the bailout fund and fiscal pact on hold. After a 12-hour hearing, the Constitutional Court could not make a decision on ESM's legality and it could take months, rather than weeks before reaching a conclusion. ESM is originally expected to replace the temporary bailout fund EFSF in early July, but it couldn't come into operation before German's ratification of the treaty.

Finance Minister Schaeuble warned that a delay in the activation of the ESM "could lead to a significant worsening of the current crisis" and create "broader uncertainty in markets far beyond Germany and a huge loss of confidence in the euro area." It should also be noted that all the recent talk of direct recapitalization of banks and breaking the vicious circle between banks and sovereigns requires an operational ESM plus a region wide banking supervision body. Without that, all solutions would be temporary.

Fitch affirmed US' AAA credit rating but outlook remained negative. Fitch noted that the rating is "underpinned by its highly, diversified and wealthy economy; monetary and exchange rate flexibility; and the exceptional financing flexibility afforded by the global reserve currency status of the U.S. dollar." Also, the agency noted that "fiscal and macroeconomic risks emanating from the financial sector are moderate and diminishing." Fitch expects that the economy will gradually accelerate into 2013 and 2014. And Fitch doesn't expect to "resolve the Negative Outlook until late 2013."

FOMC minutes will be a major focus today and would likely strike a dovish tone and show that Fed officials are leaning towards additional easing. However, as the meeting covered by the minutes was immediately followed by Bernanke's press conference, most information should have been covered by the Fed chairman already. Hence, we might not get much new information today and reactions could be muted.

On the data front, Japan tertiary industry index rose 0.7% mom in May while domestic CGPI dropped sharply by -1.3% mom in June. Australian Westpac consumer sentiment rose 3.7% in July. German CPI, Canada trade balance, US trade balance and wholesale inventories will be featured later today.