Risk Rally Takes Euro Higher

Risk markets staged another day of strong rally as boosted by solid earnings from Goldman Sachs 9GS), Johnson & Johnson (JNJ) and others. The Dow closed up 0.95% at 13551.78 and looks set to challenge 2012 high of 13661.87 soon. Asian equities followed with Nikkei up over 100 pts and HK HSI up over 200 pts at the time of writing.

In the currency markets, the aussie did get some lift from risk appetite against the dollar. But the euro remains the strongest one as boosted by intensified speculations on Spanish bailout. Meanwhile, Canadian dollar is the weakest one after yesterday's selloff triggered by BoC Carney.

Olli Rehn, the European Union's Economic and Monetary Affairs Commissioner, introduced in an interview a new instrument of the ESM- Enhanced Conditions Credit Line. Rehn stated that the new toolbox is a precautionary credit line facilitating "the kind of primary debt market interventions of Spanish government securities that we would have in mind in case there would be a request."

Both Michael Meister and Norbert Barthle, senior lawmakers of German Chancellor Angela Merkel's Christian Democratic Party, stated that this "would be a possible move." This suggested the biggest eurozone lender has turned softer towards the conditions of financial assistance to debtor countries.

Expectations are somewhat rising ahead of the EU summits in Brussels later this week. It's reported that Spain is going to request a precautionary credit line so as to satisfy for requirement for ECB's OMT bond buying program. And since it's just a credit line and doesn't involve borrowing funds from ESM, Germany seems to be open to the idea. In addition to that, Moody's affirmed Spain's BAA3 debt rating with a negative outlook. That is, it's still one notch above junk level.

The Canadian dollar suffered yesterday after BoC governor Carney 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." BoC had been somewhat hawkish as it mentioned in its last statement that "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate." However, Carney's comment yesterday sounded like the central bank will retreat itself from this tightening bias and turn neutral instead. BoC will meet next week and the Loonie would remain soft ahead of the meeting.

Looking ahead, the UK will be the major focus in European session with BoE minutes featured. Also, the UK will release job market data while Swiss will release ZEW survey. New residential construction data will be released from the US later in the day.