Risk correlated assets continued to make gains in Asian session due to the optimism sprung from yesterdays well received Spanish and Italian auctions. EURUSD traded up to 1.2879 while AUDUSD after a brief dip charged to 1.0362. Asia’s regional indices were broadly higher with the Nikkei up 1.36% and Hang Seng 0.57% yet shanghai failed to contribute to the feel good atmosphere falling -1.34%. Risk taking was subdued for most of the session till FT cited comments by Greek officials suggesting that a deal regarding private debt holders could be announced today. French paper Les Achos provided a bit splashier headline say ‘debt restructuring agreement is close’. As for the current risk rally we are unconvinced and would be looking to fade the move. The main reason is that we have been at this point many times only to be disappointed. Regarding the positive auctions, we suspect that banks, absolutely flushed with cash, would be willing to take some risk, but doubt today’s auctions will yield such strong results. In local news Singapore November retail sale climbed 6.4% y/y, slightly weaker than 6.7% expected.
Yesterday brought further clarification to a few outstanding issues. BoE and ECB rate decision really didn’t provide anything new for us to work with. As was previously reported, it seems that the haircut on Greek sovereign debt might be unable to plug the deficit gap. The Greek deputy finance minister stated that unless participation of private investors in PSI scheme hits 100% then they will need to ask Europe for more funds. Given the decision by the Greek government to retroactively introduce collective-action clauses to its existing bonds, we suspect that the PSI negotiated will not go as smoothly as reported. Reuters reported that in fact the new EU fiscal tightening will include a loop hole that will allow nations to periodically dodge requirements of a balanced budget. The report says that in cases of a natural disaster and economic downturn, a nation will not have to return to deficit spending. In our minds, this illustrates the cracks already appearing in any agreement and highlights credibility and execution risk. Just thinking out loud here, but when else would there be a need to over spend unless there was an economic downturn and weak revenues? With no enforcement, nations will be using this escape clause yearly. It’s the same problem which put the eurozone in its current predicament. Both Italian and Spanish auctions went very well given the EUR a major boost ahead of the ECB meeting. The market picked up almost €10bn of the Tesoro--nearly double what was expected, but more importantly over 10% of their yearly supply. Today will be another challenge with Italian €7.5bn BTP auction at 10:00gmt, we will be watching for a slight less positive result.
Since the initial sell off reaction in EURCHF on the sudden announcement following SNB President Hildebrand's resignation, there has been steady erosion in the EURCHF. The pair is broke the 1.2100 handle (trading to 1.2087 low) and it looks like there will be a test of the SNB's commitment very soon. Given our conviction that the SNB will protect the floor and having just traded though Swiss intervention we would buyers anywhere under 1.21 with a stop located right below 1.200. To verbally assist the SNB's Buehrer, also President of the Swiss Business Federation, stated that there will be a quick transition of a new president, countering Finance Minister Widmer-Schlumpf earlier comments. Unfortunately for the SNB the market seems to have ignored the statement. On the fringes there is growing speculation that the most likely candidate to become the new chairman will be Thomas Jordan, the interim SNB president. This speculation is also leading to some doubt over Jordon’s commitment to the exchange rate floor. The basis of this conjecture is only the thinnest of arguments, such as leanings of academic and perceptions based on some past comments (primarily focused on the inflation risk of such massive capital injections). We concede that his past aggressiveness for the FX intervention might not have been as great as Hildebrand's, but this could be more a function of serving as vice chairman. We suspect in the near term, the floor will be protected with "utmost determination" but markets will be listening to Jordan's every word.
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