European policy makers are running out of new strategies but reaction was muted(31-Jan-2012)

Risk appetite was firm in Asian session as the FT produced an article suggesting that the next LTRO could find demand of up to €1trn. If this is correct it would all but eliminate concerns that European banks could face a near term liquidity crisis. Optimism continues to grow despite the fact that Eurozone summit yesterday brought no real progress on the Greek debt crisis. There is a growing sense that European policy makers are running out of new strategies but reaction was muted. EURUSD was able to rally to 1.3200 on the growing optimism while AUDUSD charged to 1.0679. In addition, news reports that Greece’s Papademos had stated that negotiators were making good progress on debt swap deal gave the EURUSD a quick 20 pip boost. Asia’s regional indices were slightly positive but provide a solid enough backdrop for European stocks to rally. Rhetoric surrounding the fiscal compact has cooled somewhat since the weekend jubilation. The Czech Republic has joined the UK in choosing not to move further with the fiscal compact. While Ireland's European Affairs Minister Lucinda Creighton warned Irish voter that should the treaty go to a referendum and be rejected it would be difficult for the nation to remain in the Euro zone. It’s clear that countries are now having second thoughts on giving up fiscal sovereignty to Brussels. There is also the worry over enforcement. The rigorous budget deficit rules being suggested, will undoubtedly be challenging, especially should growth Eurozone and global growths continue to stagnate. And remember it was France and Germany that first threw the Maastricht treaties limits out the window. This morning ECB Governing Council member Nowotny cautioned that the Eurozone economy might stagnate this year and that period could materialize. But then added he “cant be sure” Greece will stay in Euro. But traders remain optimistic will risk correlated FX trades performing well. 


The EURCHF continues to trade safely under the 1.2100 handle. The lack of fear in traders actions suggest that the Hildebrand resignation might have had deeper erosion in credibility then we had expected. Federal Council had commissioned a task force to examine the supervision practice within the SNB. There has been speculation that this decision is a power play to politicize or remove a level of autonomy from the central bank. We are not going to quickly discount this theory. We had been slightly naïve to the political force which forced Hildebrand's resignation and will not make the same mistake again. We would like to hear more details on the breadth and scope of this task force. We can’t say that historically the opposition government has been constrained with their criticism of the SNBs FX policy and view that the central bank should be less independent. Despite speculation on SNB intern chairman Jordon’s commitment to the “floor”, we don’t expect a shift in exchange rate policy or credibility issues. Earlier in the week, SNB Board Member Danthine showed no change in stance, reiterating that the central bank is ready to buy 'unlimited' foreign currencies. We have no doubt that the SNB will defend the first few attempts at the “floor” with this extreme aggressiveness, we have witnessed in the past. However, it might now even be the SNB but nervous traders that force EURCHF higher sub 1.2100. Given this historical perspective, we would be buyers anywhere below 1.2100. We see scaling into the EURCHF trade for small upside gains a decent trade.


By
M.Zohaib Gadit