Archive - Jun 2, 2010 - Story

Over the past two weeks we have seen a charade of support for the euro coming from not onlly the insolvent developed sovereigns, but from the BRICs as well (especially China's SAFE), which have hundreds of billions on euro-denominated holdings that would be severely impacted in case the euro continues on its painful slog to parity. Ironically, one country which sees no reason to sugarcoat reality is Iran - the country's Central Bank has just announced plans to sell 45 billion in euros, without providing further commentary. The proceeds? Buy dollars and, wait for it, gold ingots.

As we have been discussing, so far the slide in risk assets has been the consequence of balance sheet deflation and USD funding shortage. While those forces have been strong at work recently central bank support in the currency market and central banks FX swaps have attempted to patch the holes in the ship's hull. While the ECB is now openly intervening in the FX market and in the bond market, we have fresh recent examples of what effects central bank intervention has in the markets. For most of last year (post March) and until recently we have on numerous occasions along with many other people in the market highlighted the unbelievable correlation between days when the Federal Reserve was buying bonds in the market and post 11AM rally in equity futures and USD sell-off. Knowing that, it is not hard to imagine similar effects upon ECB intervention, with the exception that in a pro-risk environment EUR is strong whereas the Fed's support of the market has actually a negative effect on the USD. Is there additional outright intervention by the ECB in the FX market: that'spossible, but either way we have a pretty clear picture of what their actions will result in for most asset classes. - Nic Lenoir, ICAP

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/06/10