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Beta currencies are back under pressure versus USD, mainly a result of deflating ‘EU rescue plan’ comments by German officials - Merkel’s spokesman Seibert stated ‘dreams that are taking hold again won’t be able to be fulfilled’. As a result, the market’s recent exuberance regarding a workable Oct. 23^rd Eurozone plan seems to be materializing into over-exuberance as previous EFSF conflicts still remain major roadblocks to sustainable crisis resolution. Ultimately, the issue at hand seems to come down to the timing of EFSF funds availability and its sovereign implications.
While Germany’s preference would be for the EFSF to be used as a ‘last resort’, France’s preference would be for the EFSF to serve as an immediate lender. If France were to succumb to Germany’s stance, France would have to recapitalize its own banks which would imperil its AAA credit rating due to ballooning public balance sheets on increased exposure to private bank debt. Moody’s already sent out a warning shot after-hours Monday by noting ‘France may face a number of challenges in the next few months & that challenges could mean new liabilities’.
US equities sharply reversed off the key 1220/40 resistance area highlighted last week while EUR/USD shed more than -1% on Monday as its stint above the 50% retracement of the August highs to October lows around 1.3835 and the 1.3900 figure proved unsustainable
Furthermore, Monday’s -1% EUR/USD sell-off was preceded by a steep tri-peak negative price/MACD divergence on hourly charts – the prior episode of negative price/MACD divergence with similar attributes saw EUR/USD lose more than 5 figures from high to low within days – resulting in the completion of a daily bearish engulfing candlestick pattern (composite rates) suggesting further weakness for the single currency may be in store in coming sessions.
On the flip side, initial EFSF usage as a bank recapitalization medium may put pressure on Germany’s AAA credit rating due to increased German capital requirements on the probable leveraging of  EFSF initial fund availability. Overall, the likelihood that the Oct. 23^rd Summit yields a ‘comprehensive resolution’ to the Eurozone debt saga seems to be declining each day and may be setting up for another round of ‘buy the rumor sell the fact’ type price action





























In addition to technical risks, there are a number of potential fundamental EZ periphery headline risks in the week ahead:

• Spain may see regional fiscal budget adjustments released sometime this week; any evidence that the aggregate fiscal deficit target of 6% could be missed would likely send risk assets for another ride lower.
• Greece faces a scheduled 24-hr strike this Thursday as the parliament votes on proposed labor reform measures, there is elevated risk for the measures to be vetoed due to its potential impact on trade unions tied to the PASOK party which holds more than half the 300 parliamentary seats; the heavily indebted nation may be a source of further downside for risk assets if the Troika publishes the results of its 5^th review within the week.
• Italy is not remiss from headline risks ahead of this weekend’s anticipated summit as the Italian Parliament is set to vote on three proposed legal decrees, the most significant being a 2013 budget targeting policy reportedly having fresh growth & fiscal measures and thus holding the potential to cause further political discord.

Considering the myriad of fundamental and technical hurdles standing in the path to further upside for EUR and therefore broader risk assets, we maintain the view that risk may remain under pressure in the medium to long term (as noted in previous FXTECHLAB posts; see below). Accordingly, we think any short term risk rallies may provide potential short opportunities; however, we think layering positions at key resistance levels and +1% intervals in the ‘risk on’ direction thereof may be appropriate to better absorb likely volatility spikes into the upcoming Oct. 23^rd rescue plan announcement.