(Today's Market Update) 22 DEC

1^st news

dollar supply inhibited the ability of

EUR/USD to push higher at the London

open this morning. A short-lived gain to

1.4735 was followed by a move do

wn to 1.4685. While the EUR continues to

struggle vs the USD, investor

sentiment this morning did receive a fillip on

the news from the Chair of

Euro-area Finance Ministers Juncker ruling

out a bankruptcy of the Greek

State which sent Greek banking stocks surging. The Greek PM has also

made assurances that he was determined to tackle measures. That said,

there is still a shortage of detail on how Greece will proceed with respect to

it budget and thus underlying nervousness is likely to stay with the market.

The difficulties associated with the Spanish budget have re-entered the forefront

following yesterday's news that S&P has adjusted its outlook to negative.

Spain's problems are not new news. The bursting of its property bubble and

interlinked rise in unemployment to 17.9% has already left issuers of mortgage

bonds under severe pressure. Spain may be able to hold its budget deficit/GDP

ratio below that of Greece and Ireland this year, but its budget issues are arguably

more severe given its relatively largely economy. The Spanish PM has responded

this morning by saying that cutting the budget deficit was a priority.

2^nd news

The Swiss franc stole much of the attention in European hours. The market remains

of the view that the return to growth in Switzerland during Q3 will allow the SNB to

reduce emergency policy measures and allow EUR/CHF to push lower. The EUR/CHF

1.51010 level had been associated with intervention, thus the move below does herald a

new phase for the CHF. That said, it would be foolhardy to expect that the SNB will

now allow EUR/GCHF to fall sharply, so nervousness about intervention still remains.

Following a push to EUR/CHF1.4911 level this morning, a sharp bounce back above

1.4950 followed. Comments from the SNB mid-morning provided mixed signals for the

market. The SNB warned the markets that a correction of monetary policy would be

premature but also commented that low rates cannot be maintained indefinitely.

EUR/CHF edged a little lower on the back of these remarks.

3^rd news

Japanese Nov exports fell -6.2% y/y; this being the slowest pace for 14 months. The data

will ease some of the concerns that the Japanese economy is still in danger of a double

dip recession, though the danger of deflation continues to hang over Japan. Both

USD/JPY and EUR/USD are presently caught in sideways ranges. The BoJ's emergency

credit facility announced earlier this month has helped push the JPY off its strongest

levels vs the USD and the JPY and last week's pledge from the BoJ that it would not

tolerate a negative inflation rate should also protect upside for the JPY.

There has been no official UK data this morning although the CBI has revised higher its

UK growth estimate for 2010 to 1.2% (from +0.9%) and forecast not only that the BoE

will choose not to follow through with more QE in Feb but will raise rates in Q2 2010

and by a total of 150 bps by year end. This is a relatively bullish prediction for the UK

economy. EUR/GBP this morning has remained range bound.

This afternoon the Chicago Fed activity index for Nov is due. Canadian retail sales will also be released.

4^th news

The PM of Spain and Greece are yet to put their purse strings where their mouths are

with respect to taking action over their budgets. In contrast the Irish government

yesterday entered the lion's den by announcing a very painful series of savings which

were endorsed this morning by the ECB's Nowotny. Initial indications are that the

budget has not increased social unease, though further budget cuts are possible. Ireland

may be swallowing a bitter pill but the size of the UK's economy makes it far more

important on the global stage. Yesterday's UK budget dodged the issue of spending

cuts. Some tax increases were outlined but clearly the pre-budget report was designed to

implement the least amount of pain in the run up to next spring's election. EUR/GBP

remains in a choppy range. However, insofar as the budget does not bring a resolution of

the UK's budget woes significantly closer, sterling is likely to stay weaker for longer vs

the EUR on as a result of this budget. Today's BoE policy announcement is likely to be a

non-event, with the February MPC likely to be the next policy meeting worthy of

significant interest.