(As written for My Paper on 25 October 2011. Click here to enlarge)

What was original a 2 day meeting between the European finance chiefs has now been scheduled for 6 days.

With a final announcement scheduled for Wednesday, the lengthy Summit shows that the people in charge are committed to hammer out a solution for the on-going debt woes in Europe.

There are essentially 3 agendas that the finance ministers hope to achieve at the end of the EU Summit:

1. Solving the Greek Crisis
2. Recapitalisation of Banks
3. Expansion of EFSF

1. Solving the Greek Crisis

Bailout after bailout has seen 256 billion Euros pour into Greece, Ireland and Portugal. However, the bleeding shows no signs of stopping.

Talks of having a “haircut” have also intensified. Previously, an agreement in July called for investors to take a 21% cut in their holdings’ net present value. Now, European officials are considering options with write-downs as much as 50%.

The Institute of International Finance, which represents the largest holders of Greek debt, is prepared to “bite the bullet” provided the deal is backed by a concrete plan to return the Greek economy to growth.

2. Recapitalisation of Banks

90 lenders would be required to lift their core capital ratio from 5 to 9%. Banks that are unable to reach the capital requirement on private markets would get government help.

The exact amount needed is not yet finalized, since it would depend on the volume of losses suffered by banks in write-downs of their Greek holdings.

However, the figure is expected to be in the region of 100 billion Euros. The strong recapitalization plan is needed to stabilize investor confidence worldwide.

3. Expansion of EFSF

As debate rages on in the EU Summit, options for expanding the European Financial Stability Fund (EFSF) have been narrowed to two.

The first includes an insurance plan that will set aside a pool of money to offset any losses suffered when purchasing the debt of the weaker countries.

The second option would be to create a separate fund altogether. The fund would raise money from private investors and buy debt from weak countries.

A hybrid of both solutions is also possible.

Top News this Week

1. Canada Retail Sales. Tuesday, 25 Oct 2011, 8.30pm. I expect figures to come in at 0.5% (previous figure was -0.6%).

2. USA Advance GDP q/q. Thursday, 27 Oct 2011, 8.30pm. Friday, 7 October 2011, 8.30pm. I expect figures to come in at 2.2% (previous figure was 1.3%).

Trade Call

Long USD/JPY at 76.50

Last week, USDJPY touched an all-time low of 75.79. In normal circumstances, this would be a clue to have a short bias, since momentum is down. However, the Bank of Japan has signaled the intervention alarm, as its strong currency threatens to squeeze exporters’ profits and stall the economic recovery.

On the hourly chart, entry is taken at 76.50 and a protective stop of 45 pips is placed just below the closing price of the hammer candlestick which caused the new low of 75.79 last week.

We will have two profit targets on this trade.

Entry Price = 76.50
Stop Loss = 76.05
1st Profit = 76.95
2nd Profit = 77.40