Japan To Buy EFSF Debt - 11.1.2011

During the Asia session, FX markets were driven by news that floodwater had reached Brisbane, and that Japan intends to buy bonds issued by the EFSF - Europe's EUR440 bn financial rescue fund. Although the price action was volatile the dollar is largely unchanged against the euro at the time of writing, but AUDUSD dropped more than a big figure. EURUSD traded 1.2912-1.2991, and USDJPY 82.68-83.14. Atlanta Fed President Lockhart, an alternate voter in 2011, continues to support QE2 as there are further headwinds to the US recovery. He said the December jobs report showed a modest pace of recovery and he sees little sign of inflationary pressures. Lockhart also said the Fed's monetary policy is not intended to influence the dollar. Dallas Fed President Fisher sounded somewhat sceptical of additional monetary easing given he believes that the Fed has done "near as much as we can do", and that boosting the US recovery is up to fiscal authorities now. Philadelphia Fed President Plosser and Minnesota Fed President Kocherlakota are due to speak later today, Economists still look for moderate dollar strength ahead as the US recovery continues and external developments remain in favour of the dollar.

EUR

The euro got a boost after Japan's Finance Minister Noda said Japan intended to buy about 20% of the forthcoming bond due to be issued by the EFSF around the end of January.

Finland's Finance Minister Katainen said that Portugal needs to take strong political decisions to calm markets, and that Ireland may not be the last country to seek EU/IMF help.

French, German, Portuguese and Spanish officials denied reports that other Eurozone member nations were pressuring Portugal to accept a bail-out package amid the pressure on its sovereign borrowing costs. A French official was also quoted as saying the situation in Portugal is not as serious as was the situation in Ireland or Greece. Eurozone peripheral cash spreads tightened but levels still remain elevated around late-2010 wides and the upcoming auctions for Italy, Portugal and Spain will be the barometers for their borrowing costs. There were also reports that the ECB had been active with their Securities Markets Programme but we will have to wait until the weekly settlement data is published next week.

JPY

Japan's Finance Minister Noda said Japan intends to buy about 20% of the forthcoming EFSF bond. The eventual size of this first EFSF offering is not yet known, but is expected to be in the range of ?3-8 bn. Noda said he would like to use existing euro-denominated FX reserves to fund the purchase. As such, we do not expect any FX flow to accrue from this possible future transaction, although Japan's involvement should be seen as a mild euro positive.