Nervous Calm Leaves Greenback Mixed

The US dollar is decidedly mixed, gaining against the euro, Swiss franc, and the Canadian and Australian dollars compared with yesterday's New York close, but lower against sterling, the yen (for the fifth day), and New Zealand dollar about half way through the 24 hour session.  While the MSCI Asia-Pacific Index eked out a marginal gain, the European bourses are lower.  Month and quarter end portfolio adjustments are making it difficult to separate the signal from noise.   Peripheral European bond yields are up across the curve.  

Spain still seems to be dancing around a formal request of assistance.  The deputy prime minister stated it most baldly today.  "We need to know to what extent the ECB will intervene in the secondary market", she was quoted on Bloomberg telling a local radio audience. 

  

Spain is going to announce a package of structural reforms toward the end of the week and this is referred to as a "proto-program" that is supposed to anticipate the conditionality that is likely to be associated with a formal request for the ECB's Outright Monetary Transaction support.  What will Spain get in exchange?  What is the ECB's commitment?  

Although ECB's Draghi talks about "unlimited" purchases, but when he really meant was no pre-announced or ex-ante limit to the program.  Therein lies a proverbial hornet's nest.  A German paper reports that both the BBK and the ECB are seeking legal advice as to the proportion and duration of OMT before its violates the treaties that ban the direct financing of government deficits.  The article also suggests, though no specific sources are cited, that both sides are preparing for the possibility that the issue goes before the European Court of Justice.   

Meanwhile the IMF has acknowledged what the market has been digesting for a couple of days, namely that Greece has a "financing gap" that is a consequence of the delays in privatization and the greater economic contraction.   The IMF is reportedly pushing for a new debt restructuring.

Given that two-thirds of the Greece's debt is in official hands, the focus is there.  While the IMF can push an OSI, it wants to recluse itself, as does the ECB (which encourages some skepticism about the legal status of Draghi's claim that OMT purchases will not have seniority).  That pushes the burden to the EU and European governments, which can only make new aid programs more difficult to secure parliamentary support.

Reports suggest that Merkel is considering presenting Spain's eventual request for aid, along side a program for Cyprus and Greece to one parliamentary vote in November.   She has often had to count on opposition support (SPD and Greens) for her European agenda and this time may be no different.  However, it risks further estranging her FDP coalition partner which in national polls is struggling to meet the threshold for national representation in next year's election.

Turning to sterling,its resilience remains impressive, though off the spike that carried it above $1.6300 briefly at the end of last week.  Some are linking sterling's ability to poke through yesterday's high to month-end and quarter-end flows.    Support is seen in the $1.6160-80 area.

Lastly, as the dollar spends more time below JPY78, talk of intervention is likely to resurface.   Japan is in the middle of cabinet reshuffle and a new finance minister is likely to be named in the coming days.  Official rhetoric may increase if the dollar approaches JPY77.  It is noteworthy too that  the yen is not just firm against the dollar, but also against the euro.  In fact, the euro is slipping through its 20-day moving average against the yen for the first time since August 13.  The BOJ has rarely intervened on the cross but the point is that the yen's weakness on the marginal expansion of asset purchase program has been completely unwound.