- China told its banks to ask for faster repayment of local Gov’t infrastructure loans on worries current debt terms leave the banks with too much risk. Bloomberg
- Moody’s says a default of a Eurozone sovereign unlikely – Moody’s says that countries like Greece, Portugal, and Ireland should be able to avoid default b/c of strong domestic investor bases that will buy their government’s debt. FT Right, just like house prices won’t go down because there will always be people to buy houses. EU Spreads have been quietly widening again over the past week. Portugal spreads are only about 30bps from its Sept wides.
- RBA hiked 25bps overnight vs expectations of unchanged. Its outlook remains unchanged and assumes some further tightening down the road.
- India also hiked, but the move was expected. The statement suggests that it is done for now, even though inflation is running well ahead of its target.
- EURCHF has been a popular short for much of the year. EU sovereign risk was probably the single biggest driver, as capital flows overwhelmed SNB intervention efforts. The cross traded down to 14% cheap vs the PPP measure, a historical extreme. Even after the 2 month bounce, it is still trading quite cheap vs PPP:
So from a valuation perspective, there appears to a good case to be long.
However, the original catalyst for the move is still looming. PIGS CDS, weighted using GDP, remains wide, and recent comments from Greek officials have been far from soothing.
EURCHF is only here due to the PIGS risk premium. As a result, one may want to consider the probability of further CDS widening in the immediate future. This 2 month bounce in EURCHF despite a broadly stable PIGS CDS levels suggest that much has already been priced in. Both valuations as well as economic momentum appears to favor further upside here, as EU-Swiss IP differentials remain wide:
This suggests that, in the absence of further PIGS CDS widening, EURCHF can continue to rally.
- Given that it’s election day, I liked this post: