Risk appetite remains supported at the start of this trading week. The hope that we are near to a complete plan continued to squeeze short risk trades out. While we will not get in front of current price action and are still looking to accumulate long risk FX positions, we are surprised by the extent of the risk primia unwind considering that no real details of the any plan have emerged. In addition, European policy makers have historically provided us with grand statements just to come up short in execution. But financial markets have a soft spot for grandstanding and will continue to buy the rumors until hard and highly probably faulted facts materialize. Questions regarding the extent of private sector haircut on Greek debt, extent of leverage in the EFSF and details of bank recapitalizations are scandalously incomplete and light on specifics. However, unlike pass responses there definitely seems to be a real concrete effort by European and Global policy makers to find a solution.

Last week the EC published a report that explains in general terms, the outline for such a plan. The report discusses, strategies to address concerns over Greek solvencies, extension of EFSF, bank recapitulation, new EU governance proposal and efforts to bolster Eurozone growth. The market reacted positively to this report with risk assets rallying broadly and EUR short widely unwinding. The weekend G20 finance ministers meeting and central bank governors in Paris ended without any market moving developments. The official statement said that the world economy faces heightened tension and significant downside risk. That said, the IMF seems increasingly willing to play a larger part in solving the European debt crisis, specifically in terms of addressing liquidity issues through additional lending. Comments from the meeting suggest that ministers are in talks of endorsing sections of an emerging strategy to avoid a Greek default and recapitalize banks. The IMF Managing Director Lagarde stated that a new proposal will be presented at the Nov. 3 G20 summit. But before that announcement, we have this Sunday (Oct 23rd) critical Eurogroup summit were the new detail on the complete plan should emerge.

We are starting to see some action in the USDJPY. In Japan, Industrial production was weaker than expected coming in at 0.6% mom vs. 0.8% exp. and 0.4 yoy. Despite the broad evidence that Japan economic condition remains fragile the JPY remains in high demand. BoJ Governor Shirakawa stated that fear in the global economy is supporting JPY appreciation. Last Friday USDJPY rose sharply to 77.39 on a Dow Jones report that suggested that Japan is considering new measures to deal with the painfully strong JPY. According to the Dow Jones report the Japanese government is looking at ways to encourage corporate to invest abroad. Specifically the government would expand the facility to finance purchases for international M&A. This strategy comes on the heels of other plans in the September 20th interim report including subsides to R&D facilities in Japan and increasing the raising the annual ceiling for Financing Bill issuance. So far most of these ideas are geared towards helping the economy deal with a strong JPY rather than direct FX intervention. We should get more clarity on potential measures around Oct 20th when the third supplementary budget is released.
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