French Banks to Reinvest Greek Debt; US Inflation Edges up

USD has been trading lower across the board since London open. Euro supported by news from China and France. Will SNB attempt to stop the freefall in EURCHF? Fed's preferred inflation indicator rises to highest since Aug 2010.

USD continued higher throughout the Asian session but currently trades lower across the board. An improvement in sentiment is pushing equities, commodities and higher yielding currencies higher.

The improvement can be attributed to Chinese premiers remarks that China will continue to invest in European debt. This is already a second announcement in a few days as China announced by the end of last week that it would buy Hungarian debt. The improved sentiment can also be attributed to news that French banks have an agreement with French government to reinvest Greek debt into longer maturities. French and German banks have the largest exposure to Greece. German banks have already shown interest in the French model.

EURCHF continues its freefall, reaching historical lows at 1.1816. At the beginning of April, this pair traded at 1.32 which promotes the speculation whether the SNB considers such a large and rapid move disorderly and whether it will try to slow the market down by intervening in the market. There have not been many comments from SNB officials lately and SNB holds a large long position from around 1.50 after unsuccessful interventions throughout 2009 and 2010.

US May personal income +0.3%, while personal consumption expenditure was flat (worst since Sept '09). PCE core prices (Fed's preferred inflation indicator) rose 1.2% y/y (highest since August). The combination of flat spending & rising inflation is not exactly what the Fed has wished for.

Traders should also pay attention to FOMC voting member Kocherlakota who speaks at 11:00 am in Montana. Audience questions are expected and Narayana Kocherlakota mentioned a few hawkish comments recently.