Financial News

• The euro fell below the key psychological threshold of $1.30 yesterday as concerns over Europe's sovereign debt crisis escalated. "If it continues at this rate, it will go to $1.29 for the year, and we will have  a further euro decline in the first half of 2012 to the low $1.20s." Comments from Brown Brothers Harriman in New York.
• More worryingly, for the first time there seems to be opinion surfacing on an even lower call for the single currency. Global bond investment behemoth Pacific Investment Management estimates the euro could be pummelled down to parity with the dollar during 2012. The forecast, which implies another 23% decline in the currency, comes from Scott Mather, head of global bond portfolio management at  Pimco. In a telephone interview to the newswires, his comments of "parity with dollar next year is not out of the question. I am more bearish on the euro now than three months ago." 
• That said, the euro did get some brief respite, pulling briefly back above $1.30 when a French official said that Standard & Poor's Ratings Services had not warned the government about a downgrade. Market participants have been waiting for more details on whether the country will hold on to its pristine triple-A rating. Speaking on condition of anonymity, the official said that the intentions of S&P regarding France's credit rating are unknown to the government at this stage. He insisted that there was no reason that investors would doubt France's ability to service its debt.  S&P typically gives a government 12 hours notice ahead of a change in its ratings. 
• The European Central Bank on Wednesday allotted $5.122 billion at its seven-day dollar swap operation, up from $1.602 billion a week earlier, after about $50 billion was allotted at a three-month dollar tender on December 7. However, exchanging euros for dollars is still an expensive operation. The three month euro dollar cross currency basis swap was at minus 147 basis points against minus 145 basis points on Tuesday.
• Focus today will be on the Swiss National Bank and if it changes its floor for the Swiss currency. Goldman Sachs, which expects the Swiss economy to slide into recession in the final quarter of 2011, does not think there will be any new measures from the SNB but expects the statement "to reflect a growing concern about the deflationary risks for the Swiss economy." Exchange rate interventions are the main instrument left in the SNB's monetary toolbox at this point, the analysts wrote in a note:  "As the deflation risk for the Swiss economy increases, we would expect the SNB to re-peg the CHF at a level of 1.30. Although the announcement of a re-peg at today's meeting is unlikely, we think the wording of the statement will leave the door open for such a move at a later stage during the first quarter of next year." Barclays Capital analysts also point out that while there is a "very strong case for further loosening of monetary policy in Switzerland but that the extreme market uncertainty about the euro area sovereign debt crisis means that the SNB will probably wait until the situation is somewhat calmer." 
• Overnight, the euro and commodity-linked currencies such as the Australian dollar remained under pressure in Asia following broad sell offs in risk assets yesterday amid continuing European sovereign debt problems. Italy's borrowing costs rose to a euro era high at an auction as caution persists over the possibility of credit-rating downgrades for euro zone countries. Traders comments: "I don't think the trend of dollar buying on the back of risk reduction has changed," from UFJ Morgan Stanley Securities and  "Given that the Federal Reserve doesn't seem eager for QE3, the dollar perhaps is seen as a better store of value than gold at the moment," from currency strategists at Macquarie Group. 
• Market participants are closely watching Spain's bond auction and a speech by European Central Bank President Mario Draghi later in the global day for additional trading cues on the euro. Looking ahead, market focus still remains firmly fixed on how European leaders plan to solve the debt crisis. "There isn't a broad framework yet. The amount of bailout money available isn't clear, although there are various figures floating around. Meanwhile, the US economy isn't too bad. The comparison between Europe and the US is likely to continue going forward." 
• The euro was at $1.2987 in early trade from $1.2983  in New York and was at Y101.40 from Y101.31. The dollar was unchanged at Y78.07 and was at CHF0.9542, after rising to a fresh 10-month high of CHF0.9543, from CHF0.9535. The pound was at $1.5448 from $1.5464. The Australian dollar was trading at US$0.9894, down from US$1.0023 and the ICE Dollar Index, which tracks the US dollar against a basket of currencies, was at 80.535 from 80.537. 
• Just out. SNB leaves currency limit at 1.20 francs per euro. SNB leaves target for three month libor at 0.00% as expected. SNB says its ready to take further measures if necessary. Most market participants were expecting some action from the SNB today (see commentary above) after disappointing producer and import prices yesterday.