Mistrust Euro Bounce

The US dollar is generally weaker across the board.  These are holiday thin markets and the price action seems a reflection of necessary flows.  The main news that appeared to steady the euro were reports suggesting China is prepared to by 4-5 bln euros of  Portuguese debt.  Other reports indicate PBOC officials have not confirmed the earlier reports. 

Color me skeptical.  First, there are many observers in China who have expressed concern about the safety of US Treasuries.  Even if China is trying to launch its own debt rating agency and wants to play politics with it, there is simply no way any reasonable investor can see Portugal's bonds as safer than Treasuries.  Remember Portugal does not have the euro printing press.  US has dollar printing press.  It is not even worth writing a compare and contrast piece on the difference.  It is though true that given China's massive reserves 4-5 bln euros is little more than a rounding error. 

Second even if true, how does this solve Portugal's debt problems?  It may ease next year's refunding, but at what interest rate ?  And what does that do for debt/GDP ratios   fiscal austerity ?  competitiveness ? 

In fact, Portugal's 10-year yield is up 6 bp today (Germany -2 bp) and the 2-year yield is up 16 bp today.  The euro's bounce then is more likely just normal market noise and not the beginning of a real recovery.  The euro is within Tuesday's trading ranges.  The dollar is heavier relative to yesterday's range against the yen--new six day low is recorded.  Exports accelerated in Nov, but yen gains seem to be flow driven with month-end and year-end corporate business seeming to dominate. 

Little fresh UK news.  Q3 GDP was revised 0.1% lower to 0.7%.  And the BOE minutes showed a 7-1-1 vote, as expected.  Demand for 3-month money from the ECB was a bit stronger than expected and additional year-end funding will be provided tomorrow.  Nothing much to read into it.  Banks trying to secure funding and may have taken more than needed.  ECB also offered US dollars in 14-day operation rather than normal 7-day.  This too to help with year-end funding. 

Short-term technicals are consistent with further dollar losses in the early going in North America, but euro problems are not over and US economic data, including what will likely be an upward revision to Q3 GDP, stands in stark contrast with the news stream from Europe and Japan.