Tag Archives: Swiss franc

EU Leaders Trigger Another Market Panic

As pointed out by Markit yesterday, the EU leaders has come up with another financial agreement, and once again the bond markets panic. The agreement is a proposal to replace the European Financial Stability Facility (EFSF) with a new mechanism that allows the EU authorities to “bail-in” the holders of sovereign bonds. This means in practice that investors may be facing interest free periods on their bonds, as well as other forms of “haircuts” on their investments. The proposal will also dramatically increase the probability of sovereign default in the euro zone.

“This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union.”


Last Friday’ summit only agreed on some minimum parameters for president of the EU Council Herman van Rompuy’s next task force, but the difference in views between the EU members on how the crisis resolution mechanism should be is still remain extreme. Germany wants the “bail-in” mechanism to replace the EFSF. As a result European bond spreads is on the rise again, with borrowing costs increasing for the most troubled EU nations.

The gap between the German position on future crisis resolution in the euro zone and of other EU member states is a fundamental conflict that remain unresolved.

Germany is favoring a mechanism that allows an “orderly default” of the EU nations with the largest debt burden and the most severe economic problems.

Investors understand that the German proposal will dramatically increase the probability of future sovereign default in the euro zone.

In addition, they could be forced to accept interest pauses on their bond holdings, as well as other forms of so-called “haircuts”.

However, most of the other EU leaders have taken a stand against any sovereign default within the euro zone.

Here’s Herman Van Rompuy, President of the European Council, outlining the recommendations of the Task Force presented to the EU Heads of State or government on Friday.

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The Show Will Go On

The EFSF is not a solution to a crisis resolution, it is merely a temporary arrangement set to expire in 2013.

The European Financial Stability Facility (EFSF) is a special purpose vehicle (SPV) agreed on by the 27  member states of the European Union on 9 May this year, with the intent to preserve financial stability in Europe by providing financial assistance to euro zone states in financial trouble.

The proposal that now is on the table is supposed to replace the EFSF, maybe before the EFSF expires.

That will be decided by voting in the EU Parliament, next year at the earliest.

There’s a long and winding road ahead…

Turkeys Voting For Christmas

Italian ECB board member Lorenzo Bini Smaghi says, according to Reuters, that it was easy to talk about an orderly crisis resolution mechanism, but much more difficult to implement it:

“In advanced economies the restructuring of the public debt would have to involve a much larger number of financial assets and liabilities, including those of the domestic banking system, vis-a-vis residents and non residents… It can be easily seen that there can hardly be anything ‘orderly’ in such a process.”

And it’s hard to imagine Greece, Ireland, Spain, or Portugal agreeing to a crisis resolution mechanism, whose main effect would be to drive up their bond rates.

It would be like “turkeys voting for Christmas.”

“This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union,” eurointelligence.com comments.

The structure is simply not capable of handling default, and at the same time ruling out bailout and exit.

This could easily go on until the EFSF expires in 2013.

Meanwhile, all we can do is watch the credit market falling apart – piece by piece.

French Fury – Irish Bailout

“Will all the lawyers please the room,” Le Monde writes Tuesday.

(As understandable as this wish may be, it is perhaps a bit unrealistic.)

Le Monde argues that it is crazy trying to renegotiate the financial stability treaty, and that leaders should focus on what they need, rather than engaging in long detours.

Ireland is perhaps the EU state with the most acute problems right now, after the nations CDS spreads closed above the 500bp level yesterday, near a new all-time-high.

In an article in the Irish Independent today,  Colm  McCarthy does the math on the Irish goverment’s refinance operations.

The Irish government has postponed their borrowing in September and October, due to the high borrowing. But the borrowing is only postponed, McCarthy points out.

And the Irish borrowing costs keep rising.

“What happens if the re-entry into the bond does not work?,” McCarthy asks.

Answer: A bailout by the EFSF – of course!

10-year sovereign yields

Previous day Today
Greece 7.095 8.640
Ireland 4.054 4.744
Portugal 3.259 3.794
Spain 1.618 1.804
Belgium 0.786 0.826

Euro bilateral exchange rates:

Previous day Today
Dollar 1.3818 1.3935
Yen 112.88 112.29
Pound 0.8731 0.8678
Swiss Franc 1.3636 1.3814


Filed under International Econnomic Politics, National Economic Politics

The Fight Against Currency War

G20 pledges to avoid weakening currencies to boost exports and to let markets increasingly set foreign exchange values, after the weekend summit. The risk of a of currency war seems to have abated somewhat, and the USD is now at a 15-year low.

“The terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.”

Camilla Viland

As expected, currencies were discussed at the G20 meeting over the weekend. The finance ministers of the group now pledges to avoid further weakening of currencies, to boost exports and to let markets increasingly set foreign exchange values. This could be interesting…

First of all; there was no decision on the US proposal for current account targets, and this debate will be continued at next months G20 meeting in Seoul.

And second; the terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.

“However, it is very positive that they have come up with a joint statement on currencies,” analyst Camilla Viland at DnB NOR Markets writes in Monday’s Morning Report.

Previously this has been avoided in fear of alienating China, she points out.

USD At 15-Year Low

The USD weakened after the G20 meeting, as the risk of tensions in the currency market has abated, according to DnB NOR Markets.

Camilla Viland

“The dollar has, among others, weakened versus Asian currencies on the prospect nations in the region will refrain from intervening in foreign exchange markets,” Ms. Viland  writes.

Expectations of the Federal Reserve announcing another round of quantitative easing next week also helps in bringing the dollar down.

Another currency which has weakened over the weekend is the Swiss franc.

“The currency is normally seen as a safe haven in the currency market and the weakening may be a result of lower risk of a currency war,” the Norwegian analyst says.


Biggest Strauss Kahn Statement – Ever?

Dominique Strauss Kahn

The G20 financial leaders also decided that Europe will surrender two seats in the IMF’s executive board to emerging nations, like China, India and Brazil with the intent to give these countries more power.

IMF-chief Dominique Strauss Kahn said that this was the “biggest IMF reform ever.”

Yeah, right!

Mr. Strauss Kahn is about to get a reputation for distributing pompous – and not very well founded – statements.

See also: In The Brigh Minds Of IMF


German Economy Still Flying

The German IFO index rose from 106.8 in September to 107.6 in October.

German Economy Recover

This is the highest outcome since May 2007, and better than consensus’ estimate of 106.5 and the outcome signals solid growth for the locomotive of European economy.

However, it is worth noting that this month’s improvement was not only due to better current conditions, but also due to a rise in business expectations.

“The latest developments in the German economy have been positive. However, we do not expect this to last. Due to sluggish international growth and a strong euro, growth will abate going forward. Fiscal tightening will also weigh on German growth,” Camilla Viland at DnB NOR Markets writes.

And Now; The US Housing Market

From the US, figures for existing home sales in September will be released Monday.

The Pending home sales index, which is an indicator for actual home sales, has risen over the last two months.

Mr. Housing Market

And we may see a rise in existing home sales this month, too. (Consensus expects 4.3 million houses to have been sold in September, up from 4.1 million sales in August.)

“Such an outcome is positive. Nevertheless, the levels of monthly house sales are very low seen in a historical context,” Camilla Viland notes.

And yet to come; the impact of the foreclosure scandal…

Scandic Updates

Here in Scandinavia several important events are on the agenda this week.

In the Norwegian, Norges Bank‘s interest rate meeting and the release of a new monetary policy report, will probably get most attention.

“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.

In fact, a survey by the financial news agency, TDN Finans, shows that out of 17 participating analysts, no one expects the Norwegian Central Bank to rise its key rate.

(But wouldn’t it be fun if governor Svein Gjedrem pulled one last stunt before he retires in December?)

Anyway – the central banks new interest rate path (a prediction of the key rate level going forward) will probably be the most interesting thing for Mr. Gjedrem & Co.

The interest path rate has been lowered a few times already this year, and the interest rate is currently set to be raised around New Year.

“Given the latest developments we do not see this as likely. Foreign swap rates have fallen markedly since the previous report was released in June and inflation has been lower than anticipated. This indicates that the interest rate path will be lowered,” DnB NOR Markets says.

Adding: “We expect that the new interest rate path will indicate that the next rate hike will not be until March or May 2011.”

Also the Swedish Riksbank meets this week, holding their monetary policy meeting on Tuesday.

“The Swedish economy has performed strongly lately and this is one reason why the Riksbank has raises rates by 50 bps since the bottom. The Riksbank has signalled that more is to come and both we and consensus expect them to raise the interest rate by 25 basis points, to 1.00%, at tomorrows meeting,” the Norwegian money market specialist says.

More from DnB NOR Markets:

OSE Share recommendations. 25 – 29 October 2010.

Weekly FX Update.

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Comments Off on The Fight Against Currency War

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Commodities: Dollar Movements And QE2 Sets The Agenda

Commodity markets has been recording strong gains recently driven to a large extent by the expectation that the US Federal Reserve will embark on another round of quantitative easing. But the focus is shifting towards the falling dollar. Here’s the latest analysis from Danish Saxo Bank.

“Without continued dollar weakness the rally will be running into trouble.”

Ole S. Hansen

The dollar has lost ten percent versus the euro and now trades at a 15-year low versus the yen. “Technical the uptrend is firmly established, however the failure of the dollar in making further progress last week led to a sharp 40 dollar reversal in prices. This indicates that the market is currently overbought and that some consolidation is now required before the next attempt higher,” analyst Ole S. Hansen at the Danish online bank, Saxo Bank, writes in his latest analysis.

The Reuters Jefferies CRB index returned 4.8 percent this past month with volatility continuing at elevated levels as seen below with large differences in performance, Mr. Hansen  starts.


Money managers have recently returned to commodities. The combined speculative long positions on U.S. exchanges are at a record high, especially driven by increased positions in grain and metals. The net energy position is negative due to a large short position in natural gas.


Gold continues to make all the headlines with interested buyers counting anyone from central banks to retail investors. Silver has never the less been the star performer having outperformed gold by 14 percent during this recent rally. Being called the poor man’s gold it tends to outperform during extended rallies like the one seen recently. On that basis it is also likely to sell off harder once profit taking sets in which we experienced towards the end of the week.

Most researchers and commentators agree that metal prices will continue to rally going into 2011 as the fundamentals behind the current move will stay with us for a long period of time. Sovereign indebtedness combined with an exceptional amount of stimulus will ensure official rates staying low for a prolonged period removing the opportunity cost of holding metals. The fear of a weaker dollar in the months ahead however continues to be the main driver.

Investors based in Euros and other currently strong currencies like CHF and AUD will be surprised to see that their gold position has actually declined in value during September despite all the bullish headlines. This is a clear indication that without continued dollar weakness the rally will be running into trouble unless other factors like inflation fear or double dip recession emerges.


Technical the uptrend is firmly established, however the failure of the dollar in making further progress on Thursday led to a sharp 40 dollar reversal in prices. This indicates that the market is currently overbought and that some consolidation is now required before the next attempt higher. Saxo Banks yearend target of 1,350 has been met and currently it looks likely to be exceeded given the strength of the current rally. Technically the steep uptrend since July provides support at 1,290 before the previous high at 1,265. A move through the recent high at 1,365 would bring 1,400 into play.

The price of crude oil has rallied strongly recently finding support from a weaker dollar and of signs that US inventories have slowly begun to tighten while strong Chinese economic data also helped. The near month of November almost touched 85 dollars before profit taking on short dollar positions ahead of US employment rapport drove prices back towards 80 dollars.

The above mentioned three factors will continue to be the main drivers over the coming months. While we find it unlikely that the year high at 87.15 will be broken anytime soon it has to be accepted that a potential continuation of the weaker dollar theme could trigger such an event.


The speculative long position has now more than tripled since the lows back in August indicating that money managers have returned to the market albeit not in the same kind of size recorded when we breached 85 back in April. This reflects the trading behavior during 2010 where range trading has been the preferred trade. A move back below 80 would bring the middle of the year long range at 78 back into play.

Operators of very large crude carriers are still struggling as the supply of tankers currently outstrips the demand by nearly two to one. This has brought the cost of hiring a VLCC on the benchmark route from Saudi Arabia to Japan down to USD 2,500 per day from a 2010 peak of USD 70,000 back in June, and is well below operating cost.

Natural gas prices continues to suffer and for the second year running it is sitting at the bottom of the performance table having difficulties in getting any traction despite the ongoing rally in other products. The end of the hurricane season passed without any major incidents combined with ample supply and near term forecast of milder weather has driven prices to a year low at 3.60 dollar per mmBtu.

Recent price drops attracted renewed interest in buying natural gas through ETFs. The problem which is not that well addressed is the negative impact the forward price curve has on the performance of these. ETFs tend to track the near month natural gas contract and currently the price difference between November and the peak season contract of February is 18 percent. This leaves ETF investors a bit of mountain to climb in order to achieve any positive return on their investments.


Sugar rallied strongly this week after a recent round of profit taking as supplies from Brazil began to flow again. The renewed rally puts sugar up by 23 percent on the year and it comes amid concerns about potential limits on supplies from India, the world’s second largest producer and reduced production from Europe.



Ole S. Hansen


Wheat and especially corn prices have begun to move higher again after the sharp sell off recently that took the price of corn back to test important support at 4.50 per bushel. Ukraine, who was also hurt by the drought this summer, said they would impose export restrictions on wheat, barley and corn lasting until year end. The main focus on the week was the production report Friday from the USDA which added extra support to prices as they cut production and estimates for end of year stocks as adverse weather trimmed yields.

The supply and demand situation continues to favor corn over wheat in the coming weeks. US September wheat stocks showed the highest level in 23 years leaving the global balance in a comfortable situation. Just like other dollar based commodities the price development of the currency will be an important factor as a weaker dollar will help prices higher due to increased competitiveness on the international market.


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