Thursday in FX: Wait and See Mode

Trading in the major currencies is choppy but largely directionless.  Bernanke's speech tomorrow is seen as the near-term key.  The Greek situation is still devolving as the dispute over collateral threatens to transform the small orderly restructuring into a larger disorderly event.   Yet the euro remains firm, above the 20-day moving average (~$1.4322) and the 5-day average (~$1.4410).   From a technical and fundamental perspective, the foreign exchange market appears posed for a big move.
 

News that banks borrowed less from the ECB and the fact that no bank took up dollars at the ECB's auction this week may be lending the single currency support, but pressure on Greece is increasing.  Its premium over Germany is increasing to new records. 

Assuming that the spread reflects two considerations, the chances of a haircut and the size of the haircut, the 2-year spread is now consistent with a nearly 80% chance of a 50% haircut.  The 50% haircut is important because that is at least what is necessary to bring its debt levels down to Stability and Growth pact mandate, even though it is bigger than the hit built into the private sector participation scheme reached last month.  Talk is private sector participation is not as much as had been hoped for. 

It also raises the question that if countries have already agreed to the Stability and Growth Pact and as a treaty has the status of national law, would embedding it into constitutional amendments really increase the chances that it respected ?   It reminds me of the pact between after WWI to outlaw war. 

Separately note that the short selling ban in France, Belgium, Italy and Spain is to end tomorrow, as the way it stands now. 

Swiss and Japanese officials must fairly content with the price action in recent days.   Both currencies have stabilized.  Today the dollar is poking higher against the yen to reach its best level since Aug 10, near JPY77.23.  Additional modest gains are likely in North America, but the market will be nervous about disappointment from Bernanke.    The euro is also at its highest against the yen since Aug 10.  Near-term potential toward JPY112.    Dollar-yen vol is the lowest since Aug 8.  Euro-Swiss vol is the lowest since Aug 4.  Separately, note that foreigners continued to buy vast amounts of Japanese bills.  In the past week they bought JPY2.3 trillion down from the record JPY2.97 trillion the previous week, but still heady levels.