Spain And Germany Spar Ahead Of EU Summit

UK BBA Loans lowest on record

Nikkei up 0.77% Europe up 0.28%
Oil at $79/bbl
Gold at $1567/oz.
 
Asia and Europe
NZD Trade Balance 301M vs. 305M
EUR German CPI (MoM) n/a
GBP BBA Loans for House Purchase 30.2K vs 32.8K
GBP CBI Reported Sales n/a  

North America
USD MBA Mortgage Applications 7:00
USD Durable Goods Orders 8:30
USD Durables Ex Transportation 8:30
USD Pending Home Sales 10:00
USD DOE US Crude Oil Inventories 10:30
CAD Teranet/National Bank HP Index 9:00

Risk currencies remained stationary in one of the quietest European sessions in recent memory as markets prepared for the EU summit tomorrow and officials spared rhetorically ahead of the event. Spain's Prime Minister Rajoy noted that the key issue for the country was to be able to finance itself in the international markets. Yesterday Spain saw its cost of funds rise by nearly 200 basis points for 3 and 6 month paper. Mr. Rajoy stated that such dynamics are unsustainable and added further that EU rescue funds should be used to recapitalize banks directly. Mr. Rajoy primary point was that EU needed to work faster in order to resolve these structural problems.

On the other hand Ms. Merkel's deputy Parliamentary leader Meister stated that shared control must come ahead shared liability reiterating Germany's position that it will not consider any form of transfer union unless other EU members give up some sovereignty on budgetary and taxation matters.

The central conflict between the need for immediate bailout funds and the necessity for long term structural reform is shaping up as the main story ahead of tomorrow's EU summit. The euro has remained stationary for most of the early morning trade holding around the 1.2500 level with market players content to sit on the sidelines for now.

Elsewhere, in UK the BBA mortgage approval data fell to 30.2K versus 32.8K expected - the lowest level since records began. The news only helps to support BoE announced plan to stimulate lending within he UK economy by encouraging banks to disburse additional funds. Cable saw little reaction to the news but remained generally heavy in morning London trade drifting towards the 1.5600 level.

In North America today the eco calendar carries Durable Goods and Pending Home sales both expected to rebound from the month prior. The news could provide a small lift to risk FX especially if it helps to push equities higher, but trade is likely to remain lackluster for most of the day as markets continues to square up ahead of the summit.

Given the confrontational rather than conciliatory rhetoric ahead of the summit, sentiment remains negative with expectations low, but that does not mean that EUR/USD will not fall further if markets are disappointed. For now, despite the skeptical mood markets currency markets continue to give the EUR/USD the benefit of doubt, but if EU official truly fail to achieve any progress this week, the pair could fall sharply and test its recent lows near the 1.2300 level.