Notes From Underground: The FED CHECKS; Now it is up to the BOE and the ECB

No surprises from the Bernanke FED today as the U.S. central bank held to its previous policy as it awaits further developments on the U.S. economy and possible stresses from Europe. Chairman Bernanke held true to his form and did NOT BAIL OUT THE CONGRESS BY FULFILLING SENATOR SCHUMER’S FANTASY OF BEING THE ONLY GAME IN TOWN. Three cheers to the FED for not being the politician’s patsy. It is up to “leadership” in the executive and legislative branches to deal with the coming FISCAL CLIFF. Now the BOE and the ECB will be on the hot seat and the market senses that the U.K. will cut rates and possibly add to its QE program as the British economy has been showing renewed signs of slowing.

Following the BOE, all eyes will turn to the ECB and see if President Draghi follows up last weeks rhetoric with aggressive action. The ECB can cut the overnight rate as well as announce any stepped up BOND BUYING PROGRAM if it deems certain SOVEREIGN BORROWING RATES TO BE OUT OF LINE WITH “ECONOMIC FUNDAMENTALS”, the new interpretation of the ECB‘s mandate. In a direct jab at Draghi’s recent comments about ECB mandates, Bundesbank President Jens Weidmann warned the ECB to be careful about overextending its authority.

In a Financial Times article tomorrow, “BUNDESBANK URGES ECB TO KEEP WITHIN REMIT,” President Weidmann raises his concern that the ECB‘s independence requires it to respect and not overstep its own mandate. The Bundesbank head let it be known that he believes that the German Bank is more equal than the other members of the ECB executive board. While Jens Weidmann fired a shot at Draghi, it seems to me that the real target of the Bundesbank President was German Finance Minister Schaeuble who gave cover to Draghi for the aggressive language of last week.

German domestic politics appear to be playing out through the new enhanced mandates of the ECB. Two widely respected Bundesbankers have recently resigned over the role of the ECB. It appears that Jens Weidmann has let it be known he will not abdicate the Bundesbank’s long-held views on monetary propriety. The BUNDESBANK AND CONSTITUTIONAL COURT ARE STRONG VOICES OF INDEPENDENCE. Mario, you’re up.

***The Spanish 2/10 curve retained its recent steepness and closed at 175 BASIS POINTS as it seems that markets have covered short positions and for the moment have no desire to challenge the rhetoric of Mario Draghi. Of course, all that could change in a moment after the ECB press conference tomorrow. I advise watching the SPANISH CURVE, especially the SPANISH 2-YEAR NOTE TO SEE ANY IMPENDING MARKET CHALLENGE TO PRESIDENT DRAGHI.The SPANISH TWO YEAR WAS AT 4.94%, down 29 BASIS POINTS ON THE DAY.

***Several weeks ago I discussed the idea that the SNB (SWISS NATIONAL BANK) may well be committing FINANCIAL SUICIDE as it purchases so many EUROS to hold the EUR/CHF CROSS @ 1.20. The SNB keeps on the bid and yet the EUR/CHF continues to sit at 1.2010, a whole 10 pips above the floor and the chart of the EUR/CHF looks like that of a patient that died. An FT article today, “SWISS FACE UP TO COST OF FRANC DEFENSE.” There is no immediate cost assigned to the continued SNB intervention but the SWISS are now being compared to the Chinese for their massive buildup of foreign reserves as the SNB unloads the EUROs for various other currencies.

The SWISS intervention program is putting upward pressure on AUSSIE, KIWI SING DOLLAR and other currencies as the SNB diversify some reserves away from recent purchased EUROs so that they can have a minimally diversified portfolio. Bottom line is they can’t diversify fast enough and the SWISS FINANCIAL SYSTEM is highly exposed to a GERMAN exit from EUROLAND. Hey SNB, how about exchanging some EUROS for that IMF GOLD HOARD?

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