Analysis Correlations With

(Reuters) - The sheer complexity of Sunday's critical European Union summit is warning many investors against the durability of knee jerk market reactions and, bewildered by countless "make or break" headlines, many funds are tempted to think beyond the event. The complexity of the summit's potential fixes for the euro zone's sovereign debt and banking seizure has been debated in the finest of details across news agencies, newspapers and the web on a minute-by-minute basis for the past several weeks. And for some commentators the outcome is now binary. A solution that ticks all the boxes would deliver a surge of relief to markets, banking and global economic confidence at large. Failure would spell disaster, the end of the euro in its current form, double-dip world recession or even ...

FX Strategy Weekly Market Outlook => Irish question remains centre stage for EUR => UK data and minutes this week may threaten positive GBP tone Rumours continue to fly around about the possibility of Ireland seeking aid from Europe, and many are speculating that something will emerge from the Euro-area finance ministers meeting on Tuesday, if not over the weekend. But the situation is hard to judge. While yield spreads have widened dramatically in the last couple of weeks, this is of little current concern to Ireland as they have no need to fund until the middle of 2011. So while it may well be the case that they are forced to access the EFSF (European Financial Stability Facility) when they need to issue debt next year, there is no obvious reason why they need to do so now. There are ...

FX Strategy Weekly Market Outlook => Pro-risk currencies unfazed by EU periphery troubles; focus on G20 => BoE QIR to test sterling resilience A quiet data and event calendar means the dust should settle somewhat over global asset markets over the coming week, allowing investors to catch their breath and consider what will influence financial markets over the closing weeks of 2010. Risk appetite received a shot in the arm from the $600bln Fed Treasury purchase programme and this largely managed to neutralise escalating fears over the euro zone periphery where bond and CDS spreads hit new record highs. Though long high yield and commodity currency positions already look stretched technically, attractive yield differentials and QE flows from US into non-US assets are likely to spur ...

FX Strategy Weekly Market Outlook => GBP: prel Q3 GDP to seal Nov MPC QE vote? => AUD vs CAD: correlation switches The preference of investors to buy USD/G10 on dips ahead of the G20 meeting following supportive comments by US Treas Sec Geithner indicates that the phase of USD weakness may at least be temporarily exhausted. Having said that, currencies remain in a state of flux and USD selling may well still be the preferred course of action if central bank discussions this weekend come to nothing and discord over external imbalances and exchange rate coordination remain subordinate to individual economic interests. However, with QE2 in the US now fully discounted and risk reversals showing demand for USD puts stalling, a widening in EU peripheral spreads and profit taking in risk ...

FX Strategy Weekly Market Outlook => USD priced for QE2 after Bernanke, pro-risk flows weigh => GBP: MPC minutes ahead, policy bias still neutral? Fed chairman Bernanke implicitly admitted in his Boston speech that the Fed was likely to push ahead with more QE on Nov 3 as risks of deflation are currently "higher than desirable". The limited scope for US short end yields to fall suggests that USD downside may now be limited. However, with QE2 now effectively priced in, the risk of a counter trend move cannot be ruled out, though a leveraging up of G10 and EM currencies threaten to squeeze the USD lower still backed by positive US Q3 company earnings and a rally in commodities. In general, a combination or reasonable US activity data and a Fed commitment to more accommodation should be ...

FX Strategy Weekly Market Outlook => US data still support case for QE2 => G7 meeting unlikely to change underlying story of USD weakness The G7 meeting at the weekend will be the main focus for FX markets coming into the week, given all the talk of “currency wars”, the recent BoJ intervention and the comments from Juncker complaining about EUR strength. But it is very hard to see the G7 producing a communique that significantly opposes further USD weakness against the majors, much less coming up with co-ordinated policy steps to target exchange rates as in the Plaza and Louvre Accords of the 1980s. The comments in the IMF's latest world economic outlook should make it clear that there can be no agreement that the dollar is even undervalued. The IMF note that the dollar is still, by ...