18 January 2012 at 6:44 GMT
The FX markets continue to inhabit something of a twilight world, which might even be said to be divorced from reality - a reality which holds even very grim World Bank forecasts for Europe.
Caught between the fear that Greece's day of reckoning is surely approaching rapidly, and that a disorderly default lies just around the corner, traders fear contagion will mean that the same fate awaits Portugal and other peripheral countries. In the absence of a larger helping hand from Germany, in this scenario the Euro eventually disintegrates. On the other hand, one senses the market secretly shares our view that this is all a huge game of brinkmanship on the part of politicians and the ECB, with each player trying to ensure the endgame will safeguard their survival, and that as the Perfect Storm reaches a crescendo, we will see a final meeting of Cardinals, so-to-speak, that will re-draw the map for Europe-more fiscal union, freeing the ECB to indulge in 'real' Quantitative Easing. Hence the Euro doesn't collapse in a straight line.
The ECB song remains the same
Meanwhile ECB Council member has rather enigmatically stated that the ECB was looking into alternatives for its current limited ECB peripheral bond-buying programme, the Securities Market Programme, (SMP), and also that he needed to study the effects of cutting rates and boosting
liquidity before deciding on further steps. Same old, same old ECB, do I hear you say? It's all designed to keep up the pressure on politicians to be good boys and girls.
No one seemed to mind that Standard and Poor's downgraded the EFSF, and it is supposed that this had been widely anticipated, following Friday's downgrade bombshells. So for now the risk-on tone - set earlier this week by better-than-feared Chinese growth figures - appears to be continuing. The question is however for how long this sentiment can continue?