We are seeing a slight pullback in the EUR optimism that took shape last week. The EUR selling in light volume was partially driven by Telegraph & FT articles which reported that Irish lenders are actively calling on the emergency liquidity assistance program since they have run out of collateral used to borrow from the ECB. Support for the story came from data on Friday which stated that Irish banks had borrowed €51bn of emergency funds plus €132bn from the ECB normal facilities. As such, EURUSD traded to 1.3260 from 1.3400. In addition, the lingering effect of Fitch's downgrade of Greece's sovereign debt rating to BB+ outlook negative from BBB- (putting all three primary rating agencies sub investment grade), has dampened the EUR's short squeeze driven positive momentum.


Last week the single currency made big strides in eliminating the sell any rally philosophy, as the market woke up to the realization that EU nations would do whatever it takes to support the EUR, and the ECB was still committed to its single mandate inflation-fighting stance. The suggestion of expanding the EFSF, both in size and eligible debt, seems to have temporarily convinced the market of the EU's commitment. Some doubters do remain though; including German Finance Minister Schaeuble who sounded somewhat weary regarding the practical limitations of the EFSF, and Chancellor Merkel who still sounds hesitant to approve a quick solution, stating the plan must contain a complete strategy that must absolutely include closer economic coordination. Even these comments however, which would have otherwise been interpreted as bearish, failed to halt EUR bears from unwinding their short positions.

Today traders will be focused on any headlines out of today's Eurogroup meeting and ECOFIN tomorrow. In the absence of any erosion of EU members' commitment to the EFSF we suspect the EUR will hold its ground and ensure pullbacks are temporary and limited. In China, the 50bp RRR hike on Friday (watch for further hikes this year) continues to take its toll on risk appetite. The Shanghai Composite declined a whopping -3.03% pulling Asian regional indexes and risk correlated trades down with it (Nikkei the lone exception). While not directly connected, PBoC officials halted the CNY drop against the USD at 6.5897 vs. 6.596 last fix. Clearly the sudden appreciation of the CNY was due to Presidents Hu's visit to Washington this week and the puppet-like movement of the CNY was geared towards illustrating China's economic control. We believe that after China's hugely successfully European tour the US's ability to strong arm China has completely evaporated. President Hu declared today that the dominate role of the USD was a product of the past.

And in Switzerland, the currency summit last Friday failed to make any sensible or meaningful headway on the question of CHF appreciation (other than CHF strength was bad for business) , especially given the lack of SNB participation. Outside the summit SNB Chairman Hildebrand stated the SNB FX policy was unchanged; regardless of massive losses due to CHF intervention. Sounds like we are in for a BoJ verbal interventionist's strategy from the SNB as physical intervention will not be seen as a positive by most Swiss public officials.