While there is more and more talk about Eurobonds, including a proposal from the European Commission last week, German politicians were quick to distance themselves from the idea. Vice Chancellor Philipp Roesler, who also holds a post of Economy Minister, called such solution “irresponsible”. He said joint bond issues would be wrong because they would ease the pressure on indebted countries to reduce their deficits. Of course, they would also increase Germany’s borrowing costs, something he did not mention but clearly of his primary concern. With such bonds, there would be no incentive for some countries to get their fiscal house in order and it would be a business as usual. Germany is unlikely to agree to Eurobonds, unless Berlin gets to dictate who can spend how much an on what. Fat chance.

Meanwhile one of Italian newspapers, La Stampa, reported that the IMF has prepared a rescue plan for Italy. According to the article, loan of between 400 billion and 600 billion Euros is in the work, which would give Italy a window of 12 to 18 months to implement budget reforms. Interest rates on these loans would be in the range of 4% to 5%, making it easier for Italy to refinance maturing debt. Due to the enormous volume of the loans, the IMF would need help from the ECU and possibly other sources. So far, this is a rumor, not much more than “market talk” and still needs to be officially confirmed by the IMF. We will find out more this week.

A week ago, I looked at the NZD-USD on the daily chart, because it was approaching the main support at 0.7630. I did not intend new trades, just wanted to see how the price reacts around that level. So far, the NZD-USD moved under it, but in the last couple of trading sessions the speed of decline slowed down considerably, creating a divergence with the MACD. The commodity currencies showed strength relative to their European counterparts, suggesting that this particular bearish price swing might have see its best days. A rally in “risk” could be around the corner. To be sure, there is no technical reason to buy the NZD-USD yet. However, if a strong bullish candlestick pattern emerges here, this pair could easily climb to 0.7750 or so within few days.

Unlike the Euro, the AUD-USD did not make a new low on Friday, but rather developed a flat consolidation area. While the trend is bearish, the price could move either way from this range. The size of this consolidation indicates a 100-120 pips swing after the breakout, regardless of consolidation. I will treat this situation as a stop and reverse play, because there is always a possibility for a fake breakout.

The British Pound made a new low against the Dollar on Friday, and close near that extreme. This sets up a short-term reversal trade in early trading. For that, I need to see a bullish candlestick reversal pattern on the hourly chart. Since I am looking for short-term play here, objective will be small, about 50 pips, depending on how exactly the action unfolds. On balance, while the USD is strong now, chances for a “risk” rally or a rebound, this week are good. Have great trading week!

Mike K.