Euro Extends Rally As China Stocks Lead Asian Equities Higher

Strong rally in China stock markets led Asian equities higher today and pressured dollar and yen. The euro has been the relatively stronger one this week and also supported rally in EUR/CHF, which was triggered by talk of negative interest rates on Swiss franc deposits. EUR/USD continues its rally and is staying comfortably above 1.31 level for the moment.

EUR/USD is set to take on 1.3171 key near-term resistance soon. EUR/JPY also leads other yen crosses higher and is edging closer to 108 level. Though, commodity currencies lag behind again. The aussie's rally is limited as Q3 GDP missed expectations and grew 0.5% qoq only. Looking ahead, UK PMI services will be the main focus in European session, together with Osborne's Autumn forecast statement. US will release ADP employment as well as ISM services.

The Chinese Academy of Social Sciences (CASS) said in its "blue book" report that the think tank is "cautiously optimistic on the outlook for 2013." And it noted that "China could unveil further policies to stabilize economic growth when necessary as the government still has a relatively large room for maneuver in fiscal and monetary policy." It forecast that GDP would rise 8.2% next year, comparing to 7.7% this year. Export would jump 10% in 2013 and import would rise 13.7%. Meanwhile, inflation is expected to rise back to 3% next year.

In the eurozone, following the Financial Time's leaking of a draft MoU between Cyprus and the Troika, it is widely anticipated the upcoming Eurogroup meeting would bring discussion of the deal. The financial assistance would involve 17B euro, around 100% of Cyprus's GDP. Of which, up to 10B euro would be for recapitalizing the country's banking sector.

Germany's Finance Minister Schaeuble made a few comments yesterday. He cooled hopes that the ESM would be used for bank recapitalization in the short-term as Ireland hopes the funds would be used to buy Irish banks such as AIB and Bank of Ireland. Schaeuble also put a brake on the banking union plan. He reiterated that the plan "would be very difficult to get an approval from German parliament if you would leave the supervision for all the German banks" and "nobody believes that any European institution would be capable of supervising 6,000 banks in Europe."

Moreover, he stressed the necessity of "a Chinese wall between banking supervision and monetary policy." On the contrary, French Finance Minister Moscovici said that "The ECB must supervise all banks with a European passport."

In US, President Obama rejected the GOP's proposal that is estimated to reduce as much as $2.2 trillion in 10 years as the plan entirely relies on spending cut without consideration of raising tax on America's wealthiest people. Obama stated that the proposal by the House of Representatives Speaker John Boehner "is still out of balance. You know, he talks, for example, about $800B worth of revenues, but he says he's going to do that by lowering rates. And when you look at the math, it doesn't work."

Regarding tax hike, Obama insisted that "we're going to have to see the rates on the top 2% go up. And we're not going to be able to get a deal without it." The drag raised worries that the US economy would fall into recession if no compromise is made before the year-end. The fiscal cliff, resulting from expiration of the tax holiday and automatic spending cut of the government since January 1, 2013, might lead to a economic crisis in the US as $600B might be removed from the economy.