httpvh://www.youtube.com/watch?v=Wo7m2tPnFqU

The
Thanksgiving holiday in the US made sure that trade was quiet yesterday, with a
lot of liquidity taken off the table as a result. We heard a fair bit from
European leaders yesterday afternoon with Merkel and Sarkozy draping an arm
around technocrat Monti, however this did little to help markets. They once
again reiterated their desire for fiscal union to make sure that member states
behave themselves economically going forward. Angela Merkel was clear in her
assertions, however, that this needs to be written into treaty before any
semblance of Eurobonds are talked about. This was unimpressive to the markets
as it did not address the market’s primary desire; ECB running its printing
presses. EURUSD has dipped below 1.33 overnight with cable also slipping as the
market becomes more and more bearish.

In
a rather strange turn of economic fortune, the UK’s cost of borrowing over a
10yr term dipped below that of Germany for the first time since March 2009, a
move that coincided with the Bank of England’s launch of a quantitative easing
plan. Alas this strength only lasted for a few hours as the market began to
come round to our belief that the uncovered bond auction was not as disastrous
as most had originally thought, and German assets finished the day strongly. It
is good to see gilts performing well but we cannot classify this as a
safe-haven event without a subsequent pick up in the value of the pound, which
you can see from the table below is not happening.

Another
political shift overnight has been seen in Holland with the government there
saying that they would back the ECB having a more “active role” in markets to contain
the debt crisis “as a last resort”. The Dutch, Finns and Germans have formed
the fiscally conservative Northern Bloc in Europe and for one to be wavering is
a great help to risk in the short-term.

We
also saw Portugal’s credit rating downgraded to junk by Fitch yesterday while
Hungary was cut to BA1 after it approached the IMF for another bailout last
week.

The
data calendar is quiet today and liquidity will remain poor with most US
traders wanting that extra day off (and who can blame them given these
markets). We would expect that GBPEUR will remain quiet through the session
whilst crosses against the USD are likely to remain weak.

Have
a great weekend.

Latest
exchange rates at time of writing