• S&P: EFSF may on review for downgrade. If euro zone AAA members lose rating, EFSF would lose AAA rating
  • Fitch: France AAA for now but ability to absorb future shocks largely exhausted
  • BOC keeps rates unchanged at 1%; says second half of 2011 slightly stronger than anticipated
  • BIS was rumored buyer of EUR/CHF below 1.2400; rallied as high as 1.2425 after SNB and BIS refused comment on rumors
  • French PM: EU Treaty “framework” by March; ratification by end of 2012
  • Geithner says encouraged by European developments; no Fed money for Europe
  • Dow Jones EU to raise lending capacity of EFSF/ESM
  • FT: EU talks on doubling financial firewall
  • S&P 500 rises 0.1% to 1258; Milan falls 0.5%
  • US 10-year note yield rises 0.4% to 2.075%; Italy falls 10 bp to 5.91%
  • WTI -0.05 to $100.95; gold rises $5 to $1728.50

EUR/USD spent a range-bound session during US hours, easing on S&P’s warning that the EFSF would be downgraded if any or all of the AAA sovereigns in Europe lose their rating. Not much of a surprise to anyone who’s been paying attention these many months…1.3360 was the NY low fairly early in the day

We recovered to traded firmer during the afternoon as news reports began to circulate that the EU is looking at letting the EFSF and ESM run concurrently and that the ECB could lend to the ESM, an institution bought about by treaty, and thus eligible for central bank funding, like the IMF or EIB.

Hopes that firmer financial backstops for the euro zone, combined with tighter fiscal governance will draw the ECB into the rescue fray helped spur the rally. We stalled at 1.3420, below session highs of 1.3427. A very anemic market reaction indeed. If EUR/USD can’t rally on a confluence of events like we have seen this week (along with sharply lower European sovereign yields), when can it rally? EUR/USD ends at 1.3400.

EUR was sold heavily against commodity currencies today, particular the CAD. The BOC said the second-half of 2011 will prove stronger than expected.

CHF weakened after a fall in Swiss CPI as investors bet the SNB will ramp up its Swiss cap. The market is getting very short of the franc, calling into question how much topside will unfold if the SNB does try and build on its September success.

GBP was weak across the board today, with selling seen versus JPY, commodity currencies and even the euro…