Euro Dips On Risk Aversion

The euro retreats mildly, following mild risk aversion as Google Microsoft earnings triggered some selloff in US equities. EU Economic and Monetary Affairs Commissioner Olli Rehn said that the the framework of banking union would be completed by end of this year. And the "entire banking supervision mechanism will become reality on January 1, 2014." Rehn emphasized that the agreement was was vital "to break the vicious circle between sovereigns and banks."

Under the mechanism leaders have agreed that all 6000 banks inside eurozone would come under ECB supervision, with day-to-day oversight delegated to national authorities. ECB would be responsible for supervision of systemically important banks only and oversees others when necessary. A question though, is when ESM could start recapitalizing troubled banks as France thought it could start as early as early 2013 but Germany thought it would happen soon. Meanwhile issue on Spain's bailout request was not discussed yesterday.

Canadian dollar was shot down again by officials comments. Finance Minister Jim Flaherty said that while Canada is "still on track," the economists have told them to "anticipate moderate growth" and the economic forecasts may have to be revised downwards. This added to dovish comments from BoC governor Carney earlier this week as he warned the "synchronous slowdown under way in the global economy" could spill over into Canada. And, BoC's revised forecast next week “will take into account the impact of the uncertainty." These comments suggest that BoC would turn from a mildly hawkish stance to neutral in next week's post meeting statement.

On the data front, Japan all industry activity index rose 0.1% mom in August. German PPI accelerated to 1.7% yoy in September. UK public sector net borrowing is the main focus in European session and is expected to be at GBP 11b in September. Canadian CPI will be a major focus in US session based on recent volatility and sentiments towards the Canadian dollar.

CPI is expected to be unchanged at 1.2% yoy while core CPI is expected to slow to 1.5% yoy. Weaker than expected inflation reading could trigger another round of selloff. US existing home sales is expected to drop to 4.7m annualized rate in September.