The loser in Brussels was … FRANCE. The markets were giddy as they drank deep from the KOOL AID spring of separating BANK AND SOVEREIGN SOLVENCY … did this really occur? It is far too early to tell. For all the “PUNDITS” it seems that Chancellor Merkel has capitulated to the needs of Spain and Italy as France cheered on the brinkmanship of Mario Monti. The French, led by President Hollande, has now ended the 50-year-old policy of Gaullism as France will no longer be deemed a responsible partner for Germany as being the mainstay of Europe.
The French have made a 180 DEGREE TURN and for the benefit of hoped for growth versus German-enforced austerity, European politics is now entering a period of great uncertainty. Many are thinking that Chancellor Merkel has been bested by the likes of Monti, Rajoy and Hollande, but I and others warn not so fast in declaring the defeat of German fiscal control of Europe. The German elections are scheduled for 2013 and there is ample time for Merkel to resuscitate her image as the “IRON CHANCELLOR.”
While the German leader placated the markets and assuaged the global financial chieftains, it is no certainty that the German Constitutional Court will uphold the European Stability Mechanism, leading to great turmoil in Europe. For now the markets breathe a RELIEF SIGH but keep alert to the EUROPEAN BOND MARKETS. If BUND/ITALIAN, FRENCH, SPANISH spread differentials fail to narrow, European policymakers will have a tumultuous summer. The Brussels Summit outcome may only be the end of ACT 1.
1. SNB PRESIDENT Thomas Jordan maintained in an interview today that the Swiss policy of holding the EUR/CHF peg at 1.20 was the correct route to take as the printing of SWISS FRANCS to purchase EUROS was preventing a deflationary spiral from choking the Swiss economy. Yes, the EURO/SWISS chart looks like the EKG of a dead person as the 1.20 is a FLAT LINE. While the Swiss view this as a great success, it is too early for a celebration. There is a great deal of talk about the possibility of the Germans eventually leaving the EURO. If that were to happen the SWISS CENTRAL BANK will be left with a massive amount of a devalued currency, so unless THOMAS JORDAN is aware that the Germans will never leave the EURO, the Swiss are playing financial roulette.
The uncertainty in Europe is a very unsettling proposition for many other actors in the global financial system … THE SNB ESPECIALLY. While Thomas Jordan deems the present SWISS POLICY a success, I find it very disconcerting that a massive currency intervention has barely kept the EURO/CHF rate above the proscribed floor. Even in the hoopla of Friday’s market celebration of “GERMAN CAPITULATION”, the EURO/SWISS CROSS IS 1.2015.
2. Last week, the Mexican peso was the top currency as the markets awoke to the possibility of a significant change in policy on behalf of a new government. Presently I have no results to today’s Mexican Presidential election, but the market believes that Nieto will win and that the PRI leader will muster the strength to create a very favorable environment for foreign investment. The PESO held last week even on days when the financial markets were in the throes of market RISK OFF MODE.
It is time to pay close attention to the PESO TECHNICALS as further confirmation of improving fundamentals. Decent interest rates, improving competitive position for Mexican manufacturers and an opening up the MEX energy sector may prove a compelling story. Also, as I wrote last Sunday night, look at the Chinese YUAN/Mex Peso cross to technically measure the enhanced competitive position of the Mexican economy in terms of global trade.
Tags: EUR/CHF, France, Germany, Hollande, Italy, Merkel, Mexican peso, Monti, Nieto, SNB, Spain, Thomas Jordan