Risk assets in general were hit by a barrage of good news overnight, forcing shorts to cover and creating the sense that the stage has perhaps been set for a Christmas rally.

The key event that caused EUR/USD to spike 140 pips was the announcement that major central banks are coordinating policy to ease the cost and overall USD liquidity for European banks. The lack of liquidity has been a major source of worry in recent times and the sharp spike in credit metrics is reflecting the erosion of liquidity conditions in the secondary market. Today’s actions by the six central banks goes some way in addressing these concerns in the short term, but doesn’t address the longer-term structural issues in Europe. These actions are certainly positive as lowering the costs of USD funding helps slow the delivering process, effectively alleviating some of the symptoms of a long and protracted illness. Citigroup put out a recommendation to clients suggesting the surge in EUR/USD represented a good selling opportunity around 1.3503 (stop loss 1.3650), with a move towards 1.3145-1.2860 expected.

Given how short of euro’s the market is currently, one would perhaps have expected to see a bigger move. However, given how much emphasis is being put on next week’s EU summit, we are likely to get some hesitation from the bulls knowing full well that headline risks are still very real. Tomorrow night Angela Merkel speaks to the German Bundestag (lower house), which could give some clear insight ahead of next week’s summit. The market wants to hear more on planned fiscal integration, whilst keeping an eye on commentary about any increased role by the IMF or ECB. Looking shorter term, there is a full night of debt issuance with France and Spain each looking to raise around EUR4 billion over multi-maturities. Any sign that these are poorly bid could take some the wind out the sails of the risk rally.