Daily Report: Euro Steady After EFSF Regling Outlined Plan, Italy Vote Ahead

Markets are pretty steady this week so far except with notably weakness in Swiss Franc. EFSF head Regling outlined the plan to bolster the EFSF fund yesterday. There are two options under discussion. The first option involve a bond insurance certificates but there is dividing opinion on whether the certificate would be traded separately. The second option uses EFSF as seed money to create one or more co-investment funds. Both options aim at fire powering the EFSF fund from EUR 440 to as much as EUR 1T. EU finance ministers are targeting to complete legal and operational work by the end of this month and implementation is set for December. The EFSF 10 year bond attracted just over EUR 3b in orders yesterday. Demand was much weaker than the January sales, with EUR 44.5b orders for EUR 5b of five year bonds. The funding cost was also higher with the new bond pried at 1.04% above the benchmark midswaps, comparing to 0.17% in June sales. Japan said it bought EUR 300m of EFSF, or 10%. It's lower than the over 20% purchase of January's five year bond and June's 10 year bonds. China declined to comment on its purchase.

Italian government debt surged to a record high amid worries about parliamentary vote of the 2012 budget. Italian newspapers said that the government might have lost a majority in the lower house, making it difficult to pass the 2012 budget which will be voted again today. There is possibility for early elections for the government. If that's the case, elections would probably delay structural reforms and would put the country at hard times as the next redemption will be in 1Q2012. A new government will be formed in Greece and elections will probably take place in mid-February. However, the progress of formation of the new interim government has been slow. The opposition party is hesitant amid concerns that its supporters would think that it supports the austerity measures.

The Swiss Franc is remains broadly pressured after SECO consumer confidence dropped more than expected to -24 in the quarter October. The Franc opened sharply lower this week after comments from SNB President Hildebrand triggered speculation that the bank is going to raise the floor of EUR/CHF. Inflation data, which unexpectedly dipped to negative level, added more fuel to such speculation. SNB Vice President Jordan said yesterday that delivering price stability is a "clear mandate" of the bank. Jordan noted that pressure on franc will "remain for a while" as eurozone debt crisis "probably won't disappear" soon. Jordan also noted that SNB is "permanently monitoring" the developments and is read to take further measures when needed. While EUR/CHF is strong so far, we'd maintain that unless SNB does walk the talk, otherwise, 1.25 should be a strong resistance for the cross.

UK data will be the main focus today. BRC sales monitor dropped more than expected by -0.6% yoy in October. RICS house price balance dropped to -24 in October. UK industrial production and manufacturing production will be released later today and are expected to rise 0.1% both. NIESR will also release US GDP estimate for October. Other data released saw AU trade surplus narrowed to AUD 2.56b in October while NAB business confidence improved to 2. Canadian house starts will also be released.