MF Global Fails, Greece Calls Referendum, RBA Preview

MF Global filed for bankruptcy, Greece launched a referendum and European periphery spreads continued to wide on Monday, sparking a strong risk off trade. On the day, USD and GBP led while JPY lagged on intervention followed by EUR. Markets price 80% chance of a 25-bp rate cut from the RBA tonight, with the risk for further potential yen intervention highlight Asian trading. All 2 EURUSD and 2 USDCAD Premium trades hit all targets, EURGBP nearing full targets, while gold short is in the money. See below for detail

The rosiness of the past month evaporated on Monday after reports that futures broker MF Global would be forced into bankruptcy after bad bets on European sovereign debt.

The declines were compounded late in the day when Greece PM Papandreou unexpectedly announced a January referendum on the EU bailout deal. Given the level of popular protest is seems highly unlikely the vote will pass and Greece will be forced to call snap elections, potentially sending the country into political chaos.

Concerns that Italy and Portugal will not be able to implement measures to qualify for EFSF bailouts drove yields higher and weighed on the euro. Italian yields hit 6.15% after cresting 6% for the first time on Friday.

It is not clear how much of the bond selling was driven by sovereign worries and how much was driven by the unwinding of MF Global positions in European debt. Other moves may have been exaggerated as well as MF Global floor traders were forced to rapidly close out all positions.

US economic data also weighed as the Chicago PMI fell to 58.4 from 60.4; a reading of 59.3 was expected. On the positive side, the employment component of the index rose to the highest since April.

The S&P 500 fell 2.5% to 1253 but rose 11% in October, the best month since 1991.

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Asia-Pacific Preview

At 2330 GMT, the minutes of the most recent BOJ meeting will be released. The central bank increased its asset purchase program by 5 trillion to 5 trillion at the meeting.

The more pressing event risk comes from the Ministry of Finance, which may intervene for a second day. USD/JPY climbed to 79.50 in yesterdays trading but slipped back to 77.76 in US trading.

RBA Preview

Renewed worries on Monday may have been exactly what the RBA needed to push it over the edge and into rate cutting mode. The market is pricing in an 80% chance of a quarter-point cut. If the cut comes, AUD will initially fall about 30 pips but the secondary reaction will depend on the level of dovishness in the statement. If there is no cut, AUD will likely jump a half-cent but if the statement is overly dovish, those gains could disappear quickly. The decision comes at 0330 GMT.