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Slovakia may not have passed the EFSF changes in a Parliamentary vote yesterday, but the euro hasn't fallen off a cliff. Well not yet anyway, there are two reasons why I feel uneasy about the euro today. Firstly, stocks have opened lower in Europe, usually the euro moves closely with equities, so we think it is an anomaly that the euro isn't lower along with European stock markets. The single currency also looks shaky from a technical perspective. It is currently making another stab at 1.3700; however it has failed to break through this level on two previous occasions, which makes it vulnerable to a steeper pull-back, possibly to the 1.3550 level - the 21-day moving average.


·         Slovakia: round two. The government may have fallen after failing to push through the changes to the EFSF yesterday, but the markets are taking the move in their stride. A new debate will begin today to discuss the process for a second vote, which the market expects to pass. However, this has been a long cumbersome process. Not only are the July changes to the EFSF now deemed woefully inadequate, but Merkel and Sarkozy have given themselves a deadline of the end of this month to come up with a final solution to the crisis. However, it's taken 3 months to pass (or not in Slovakia's case) the original changes so anyone looking for a neat solution to this crisis is setting themselves up for a disappointment.

·         On the plus side, a spokesman for the Slovakian government said that the EFSF should be passed by the end of this week.

·         Added to this the Troika have said that Greece will receive its next tranche of bailout funds early next month - phew....However, the Troika did point out that Greece is behind schedule on its programme of fiscal consolidation. It also suggested that increasing the private sector involvement (read haircuts) on Greece's debt burden would be arranged towards the end of November and this would determine the 7th tranche of funds being released in December - so expect some fun and games then.

·         Elsewhere today, the Eurozone's most troubled economies have seen their bond yields rise for the second day and Spanish 10-year yields are back above 5% after a rating downgrade for some of their banks yesterday.

·         The fallout from the US Senate passing the Chinese Currency Bill is continuing this morning. The Chinese foreign ministry said that the currency bill will fail to create jobs in the US and that it violates world trade rules. The stage is being set for a major showdown between the world's two largest economic powers after the Chinese said that the US should stop using legislation to press it to strengthen its currency. It's hard to see how this will evolve, but a trade war combined with a sovereign debt crisis would not be good for the global economy and confidence levels.

·         Ahead today US Fed minutes will be key to determine how close the Fed is to further QE. I believe the dovish tone from some Fed members has kept a lid on dollar appreciation recently as further QE is very dollar negative.

·         UK unemployment data due at the bottom of the hour is expected to show an increase in the jobless rate to the highest level since 2009. If this is the case then it may boost expectations for a further round of QE after last week's surprise announcement by the BOE, which is pound negative. However, the pound has been defying gravity of late, and is higher versus the dollar since last week's announcement. However, to see the pound's true colours you need to look at it against other strong currencies including the Aussie and the euro where the pound has been extremely weak. This is a direct result of QE in our view.

·         Trichet has been on the wires today as he makes his swan song before leaving the ECB at the end of this month. He said that Greece should be able to avoid a default (but only if there are 60% haircuts applied to its bonds, Mr Trichet? ) and that the EFSF should be boosted through a leveraging effect, something he has voiced opposition to in the past.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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