Citi On The Two Latest European Deus Ex Machinas: The Improbable Swiss Franc Peg Rumor And The Impossible Eurobond Initiative

Tyler Durden's picture

Today's two, and two only, upside catalysts for this recent nano-volume breakout rally are the expectations of a Eurobond announcement following tomorrow's nth Merkel+Sark summit. Another expectation is that the SNB will announce that it will peg the SNB, an event made virtually impossible as the whole purpose of the recent media PR campaign was to telegraph to the market what the SNB would like to happen, but what will actually not happen in reality (contrary to popular opinion, central banks, when actually doing instead of manipulating, act in total surprise, not in confirmation of leaked rumors). After all why be on the hook for more billions in losses when just spreading rumors achieves the same effect... however briefly. So for those just waiting for tomorrow's headlines which will have no mention of a Eurobond (at least until the next EUR rout), and for the imminent resurgence in the CHF once the market tires of being manipulated by a still completely helpless Philipp Hildebrand, here is Citi's take on both the very much improbable peg and the Eurobond news, which we believe will not happen until the Eurozone is officially on the verge of collapse as that is the very last round in the ECB's bazooka.

From Citi's Steven Englaner:

Discussion of a CHF peg appears to be the flavor de jour today.


Price action in the run-up to a peg should not be taken as a guide to how the currency will behave afterwards. If investors think that the peg will be established above spot, they have no incentive to buy CHF until the peg is established -- any buyer of CHF in the run-up is bound to take a loss at least temporarily once buying and selling occurs at the newly established peg. Therefore, in advance of the peg, EURCHF should  run up effortlessly to the expected level of the peg.


That easy run-up does not tell you anything about how credible and successful the peg will be. Once the peg is set, any EURCHF seller will have a more attractive level from which to sell, with CBs providing liquidity on the other side. And if the EUR comes under pressure because of risk aversion or sovereign debt concerns, selling EURCHF at the peg level becomes almost a one-way bet, at which point the commitment of the SNB (possibly along with the ECB) will be tested.


The odds of success would be much higher, if the peg was accompanied by some sort of hefty tax on foreign deposits or something similar to make challenging the peg more painful. If the peg is set above market and the EUR comes under pressure, investors will basically face a choice of buying attractive CHF or unattractive EUR at the peg -- it is pretty clear what they will choose. Adding an additional cost factor to buying CHF will balance the odds if there is a negative EUR shock.

And from Citi's Valentin Marinov on those mythical Eurobonds:

EUR started the week generally supported as market participants focused on the upcoming meeting between German Chancellor Merkel and French President Sarkozy. Investors will be looking for indications that France and Germany are moving closer to issuing common bonds as measure of last resort in dealing with the euro area debt crisis. The risk to the latest EURUSD rally is that the meeting could disappoint those looking for quick resolution of the euro zone funding problems. 


Recent headlines seem to suggest that the German officials in particular are still largely reluctant to embrace the idea of euro bonds as a way out of the crisis. According to Germany’s Finance Minister Schaeuble, the common bonds will require further fiscal integration which will involve ceding SOME national fiscal sovereignty for the countries involved. One concern that the German officials seem to have is that removing the country-specific funding costs would remove the incentive for fiscal austerity at any cost needed to solve the funding problems on a sustainable basis. German government was also quoted today as saying that the euro bonds will not be on the agenda of tomorrow’s meeting between Merkel and Sarkozy. 


Even with the above considerations in mind, there seems to be little alternatives to euro bonds when it comes to finding a solution to ease the euro zone contagion on a sustainable basis. Some analysts argue that the combination of (much) larger EFSF facility and continuing aggressive ECB bond purchases could provide a respite for the solvent Tier 2 euro zone countries. Yet, the prospect for larger EFSF facility will not guarantee lower funding costs for Spain and Italy. What is more, Citi economists argue that a potential increase of the euro zone bailout fund in excess of the currently proposed EUR 440bn may result in rating downgrades for both France and the EFSF. We suspect that, with growth prospects in the fiscally weak European countries likely to remain less encouraging for now, a larger EFSF facility may fail to sustainably reduce sovereign debt risks. In turn, the need for more comprehensive solution which would address the issue of the bond market fragmentation of the euro zone could come to the fore again. 


We think that the outlook for EUR will continue to be characterized by ‘a binary outcome’ going forward. On the one hand, indications that the euro zone politicians are working towards the eventual implementation of euro bonds should be euro supportive as these will reduce further the tail risk of euro zone break-up. In this regard, signals from Merkel and Sarkozy tomorrow that the implementation of euro bonds will depend on the degree of fiscal integration in the euro area ahead and that they are willing to propose steps towards closer integration could be seen as largely supportive for the single currency.


On the other hand, if Merkel and Sarkozy rule out euro bonds in favor of temporary fixes (increasing further the size of the EFSF) tomorrow, this is unlikely to support the single currency in our view. Importantly, if the latter outcome coincides with more economic underperformance in the euro zone member states, the chances for further large-scale ECB bond market interventions could increase and add to the headwinds for the single currency. Needless to say, if the reluctance of the euro zone politicians perseveres in coming months, growing tail risks could push EUR lower still across the board

Bottom line: fade this volume vapor rally.

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hungarianboy's picture

lol. I just checked the CitiFX newsletter and they're Long USDCHF since July 14th with options.

0.84 Call Option expiry 16 August 2011.

Catullus's picture

Dei ex machinae?


Doesn't matter. Plunge 2.1 just started.

hackettlad's picture

Deus inflects to reflect the plural but not machina which remains singular (Gods out of the machine, not machines)

Catullus's picture

I would have been great at Latin if I only knew English grammar.

Attorneys generals? Men of Wars? Or Man of Wars? Ha

Waffen's picture

And yet like a Stuka, the dive breaks will be engaged and it will pull back up from the plunge after the real investors have blacked out.

pendragon's picture

surely the larger than expected spain, italy govvie purchases are euro negative or did i spectacularly miss something?

hackettlad's picture

Plural of deus ex machina is dei ex machina

Jack Sheet's picture

You're assuming there is only one machine.

Doña K's picture

When you reference ancient Greek theatre, you must use:

"apo mihanis theos) (sing.) or "apo mihanis thei" (pl.)

Just saying..

CrashisOptimistic's picture

To Eurobond or not to Eurobond.

This would be like the Fed sending California money when revenue doesn't equal spending.

Why would spending ever be cut?  To force spending to be cut, the California state government would have to cede to the Federal Reserve all budgetary authority.  The Fed would run the state gov'ts nationwide.

That's what this Eurobond thing would be.  Issue Eurobonds, take the proceeds and give it to Italy and Greece.  They don't cut spending, and then ask for more.

It can't work.

oogs66's picture

the eurobond idea has been less well thought out than even the efsf was originally...basically not at all!

Jack Sheet's picture

Right on. Essentially the only purchaser of PIIGS govt. bonds currently is Monsieur Tricheur and his printing press. How the hell could the printing press distinguish between the PIIGs and the rest when there is only one Eurobond?

Keri at Bankster Report's picture

There is a way that eurobonds could "work" (if by "work" we mean "totally destroy the little remaining soveriegnty of all EU nations"), and that way is to make the EU what the ancient EU framers (read: 1957 Treaty of Rome signatories) were actually envisioning when laying the foundation for a supra-national, supra-continental economic union.  Basically, the plan would be to make Europe a single political unit, and thus freely collect and redistrubute "from each according to his ability, and to each according to his need," after, of course, the banks get their fill, twice.  The unelected EU bureaucrats and their bureaucracies already claim superiority over national interests on many domestic matters; why not fiscal matters as well?  Could we not see this coming?

Mind you, I am NOT endorsing any of this.  I'm just saying that the plan has been transparent since 1957, which is why "crazy" anti-NWO types (amongst whom I would be honored to stand) have been yelling about the true goal of the EU for decades.  Some here on ZH no doubt know of the "currency snake," which was basically an attempt to "stablise" the various European currencies by linking circulation and interest rates to encourage  intra-European "non-competitiveness."  (Remember the given reasons why Treaty was signed in the first place, then consider the ostensible reasons, then consider the real reasons.) The plan was re-tried perennially for the better part of two decades, implemented by the various central banks and coordinated, of course, by the BIS.  At the time, the US banks were controlling the BIS, though only because the US banks were themselves controlled by the same international faces; the US banks had to, as the dollar the WRC.  Effectively, it was the first attempt at a euro-currency.

In fact, some on ZH also probably know what happened weeks after Nixon de-pegged USD in 1971: the BIS created the Euro-Currency Standing Committee----and there wasn't even a "euro-currency" in 1971!  This is the same committee that was renamed 3 weeks after the e-launch of the euro as an interbank currency in 1999: the new name?  Commitee on the Global Financial System.  You can't make this stuff up, and it really is transparent.  The goal is total centralized control of money: they'll keep the same little faces and  colors and national symbols on the various notes, but the purchasing power of all monetary units will be centrally controlled.  It therefore makes sense (if you're an evil bankster) to "harmonise" the euro bond market by eliminating discrepancies (especially valid discrepancies!) between member nations' debt prices.  Doing so VASTLY increases the centralization of power.

Personally, I wouldn't be surprised if sooner or later monetary devaluation was resurrected as the most effective form of taxation (as it has been capable of in the past).  To do this, there could be no legal monetary alternatives (ie, there would have to be only one legal currency, or a bunch of differently looking "national" currencies that were actually the same and thus each equally subject to devaluation).  There is no shortage of evildoers who would love to see exactly thing.

PY-129-20's picture,1518,780260,00.html

Just two days after the Spiegel commentator Fleischhauer wrote a critical article about Barroso and the recent EU debacle, the Spiegel received a letter from Brussels. The letter claimed that Fleischhauer had damaged the reputation of Barroso and that it was full of errors.

Fleischhauer now draws a connection to Hugo Chavez and other non-western "democracies" where leaders only accept appraisal of their work.

lol - the EU should write a protest note to Mr. Durden...


Curtis LeMay's picture

Twice disgraced NuLabour bigshot and ex-EU Commissioner, Mandelson, said all we need to know about "Europe":

"We are now entering the post-democratic age."

= = = ==

Welcome to the future, euroland: oligarchy and tyranny

After all, "they" know what's best for you...

Lord Welligton's picture

From July 1st 2008.

Not exactly news that.

MoneyWise's picture

SNB peg to the EUR, should be bullish for GOLD. IMHO.

Mountainview's picture

Yes, and it would be unintelligent as well! Hildebrand should look at Hong Kong or Brazil to look for active currency management ideas!

Curtis LeMay's picture

Another expectation is that the SNB will announce that it will peg the SNB, an event made virtually impossible as the whole purpose of the recent media PR campaign was to telegraph to the market what the SNB would like to happen, but what will actually not happen in reality (contrary to popular opinion, central banks, when actually doing instead of manipulating, act in total surprise, not in confirmation of leaked rumors).

Today I heard a new one: "verbal interventionist strategy"...

Is that like "double secret probation"?? ;)


SAJ's picture

Men of war, actually.


Derived by the same rule as "Dei ex machina".

carbonmutant's picture

More French fantasies of trading on German credit....

janus's picture

all of this to say that the eur/chf peg will effectively punt this dog that was never bred to hunt down the road; with the only change being that the swiss will be hopelessly appended to the gigantic euro-turd, left spiral along with it into the sewer of dead fiat.

Dick Darlington's picture

44% of Germans wants their country out from EMU, 59% oppose ALL further bailouts.