Euro Dips Further After IMF GFSR Report

The euro continues to correct lower against other major currencies after IMF warned that the Eurozone is exposed to a "downward spiral of capital flight, breakup fears and economic decline." In the Global Financial Stability Report, IMF said that risks to financial stability have increased since April as "confidence in the global financial system has become very fragile." And, "intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops."

The IMF predicted that European banks might need to offload as much as $2.8b in assets over the next two years to lower their exposures. That's $200b higher than the estimate back in April. Yesterday, IMF lowered estimates of global GDP to 3.3% for this year and 3.6% for 2013.

In the Ecofin meeting held Tuesday, it's decided that Portugal would be given an extra year to meet its deficit target and "the recommendation sets deficit targets of 5.0 % of GDP for 2012, 4.5 % of GDP for 2013 and 2.5 % of GDP for 2014." Regarding the banking union, Dutch Finance Minister Jan Kees de Jager stated that it is difficult for the EU to create a single mechanism for banking supervision (the banking union) by the deadline of January 1. Disappointedly, there's no progress on Spain's request for bailout.

Technically, EUR/USD is set to dip to 1.28 and below to extend recent consolidation. EUR/JPY will also take out 100 psychological level to 99.63 support. EUR/GBP looks topped below recent resistance of 0.8114 is possibly heading back to 0.8 and below. EUR/AUD is still heading back to 1.2328/2552 support zone. So overall, the euro will likely be soft in near-term. Though, the larger outlook is still bullish in the common currency and thus, we'd expect the current weakness in the euro to be relatively limited.

Fed Vice Chairman Yellen pledged that it will unwind the asset purchases "in a timely manner" at appropriate time to avoid inflationary pressures. She also emphasized that "stronger US growth is beneficial for the entire global economy." Yellen also said it's not Fed's intention to make capital flows more difficult and the emerging nations will have tools to manage that.

BoE Governor said that total output in UK now is "some 15% below an extrapolation of its precrisis trend" and he warned that the "gap is likely to persist for some time." King said that there is "no technical limit" on asset purchases, but there are "limits to what monetary policy as such can do."HE also said that the current difficulties in solving the European crisis bore a comparison with the disputes in the 1920s over German war reparations that was "too poignant to dwell on."

On the data front, Australian westpac consumer confidence rose 1.0% in October. Japan machine tool orders dropped -3.0% yoy in September. US will release wholesale inventories and Fed's Beige Book later today.