Overnight, EUR/USD saw good buying activity, pushing up to a high of 1.3690 before risk aversion hit pretty much every asset class, with EUR/USD subsequently falling to 1.3520.

While it was positive to see Finland vote through the EFSF measures, the fact that Europe has introduced a financial tax (which would take effect in three years time) and extended a short selling bans in Spain, Italy and France, saw the euro bears winning on the day. An article from Barclays on a possible ‘hard landing’ in China saw commodities coming under strong downside pressure, and the euro came along for the ride. It is also clear that Germany’s idea to get increased participation from private lenders, effectively asking for bigger haircuts, has rattled a few cages. Last night the private lenders hit back, suggesting they were not prepared to take more of a hit on Greek debt, which in theory puts stress on the second bailout package.

Arguably the big event risk tonight is the German vote in the lower house on the expanded powers of the EFSF. We expect this to be passed without too much incident, which could cause further short covering. The views of traders regarding the pair seem to be changing all the time, with many questioning whether we will break out of the recent range of 1.35 to 1.37; we feel that a break above 1.36 today on EUR/USD should see many who sold short in US trade covering positions, which could see the pair trade up to an overnight high of 1.3690. However we sense that this vote, while positive, does not really clear up the longer term mess and will therefore provide euro bears with a better level to sell into.