Once the denials start to reach fever pitch, invariably the end game is not far away. As reported in yesterday's Daily Forex Brief, Der Speigel wrote a piece on Saturday claiming that both Germany and France asked Portugal to apply for bailout money from the EFSF. There was also a suggestion yesterday morning that both Finland and the Netherlands implored Portugal to ask the question. Spain's Economy Minister Salgado claimed that Portugal does not need a bailout - very soon, reporters may be asking him about his own country's needs for funds. The EU similarly denied that any talks are underway. For its part, Portugal's Prime Minister Jose Socrates claimed that his country will be able to fund itself without external help this year, a claim backed up by the Austrian Finance Ministry. A key test of this claim will come on Wednesday when Portugal holds its first bond auction for 2011. The optimists hope that demand from Asia will be strong.

Meanwhile, Portuguese bond yields continue to climb, the 10yr yield up another 5bp at one stage yesterday to 7.16%, very close to a record high. Yields up at these levels are problematic for an economy in which nominal GDP growth is minimal. There was some relief later on when the ECB turned up as a buyer of both Greek and Portuguese bonds - the latter ended the day below 7.00%, while Greek 10yr yields fell 30bp to 12.29%. Overnight, Japan was the latest Asian sovereign to express support for Europe, with Finance Minister Noda declaring the country's intention to buy more than 20% of the EFSF bonds due to be issued later this month to fund Ireland's bailout.

Belgium's King orders caretaker PM to draw up a budget. Conscious of the circle of doubt surrounding the country's debt dynamics, Belgium's caretaker Prime Minister Yves Leterne has been instructed by King Albert II to draw up a 2011 budget that reduces the fiscal shortfall to under 4.1% of GDP. Belgium has been without a government for more than seven months, at a time when public debt to GDP is above 100%. On Monday, Belgian 10yr bond yields remained under pressure, rising by another 10bp to 4.22%, some 135bp above comparable Bund yields. Last year's budget deficit was around 4.5% of GDP.

The French economy's surprising lust for life. France's economic momentum shows no signs of losing impetus. Industrial production jumped 2.3% in November, well above expectations, after a 0.8% decline in the previous month. October production was adversely affected by strikes, which included a blockade of key ports. Business confidence in France is also healthy, aided by robust domestic demand and strong foreign orders, especially from Germany.

Swiss franc intervention-risks nudging higher. The Swiss government is starting to sweat about Swiss franc strength. The pace of CHF appreciation over the past three years has been unprecedented in the history of free-floating exchange rates, up nearly 30% in trade-weighted terms since the start of the credit crisis back in mid 2007. The worse case scenario for the CHF is a further push higher in US stocks, alongside a further deterioration in eurozone sovereign risk. Firmer stocks would be felt more on USD/CHF, the correlation near -0.80 for US equities vs. the CHF (higher stocks, lower USD/CHF). The bigger concern is the scenario of a further deterioration in sovereign risk within the eurozone, given that the impact will be most felt on EUR/CHF. Below the 1.20 level on EUR/CHF in the coming six weeks or so would certainly increase intervention risks substantially. However, the pattern of recent SNB interventions (certainly early 2009) suggests that, whilst the 'shock and awe' impact can bring early success (around 4% depreciation early 2009), sustaining this in the face of the wider drivers of the franc's value becomes increasingly difficult.

China's determination to internationalise the yuan. It is difficult to criticise China's determination to increase the yuan's acceptability as an international medium of exchange and a store of value. For its part, Beijing is pushing very hard to reduce its dependence on the US dollar, a currency it perceives to be in long-term decline and one that still completely dominates its foreign currency reserves. The latter may well reach $3trln by mid year, larger than the size of either the UK or French economies and not far below that of Germany's. At the end of 2010, reserves had reached $2.85trln, according to figures released overnight. China has allowed the accumulation of yuan deposits in Hong Kong, which have grown at a phenomenal rate over the past 18 months. SAFE announced on December 31st that it was expanding a program that allows Chinese exporters to keep yuan abroad, rather than forcing them to convert with the PBOC. Separately, the city of Wenzhou (with around 8m people) is allowing individuals to buy overseas investments in an endeavour to open up the capital account and offset some of the exceptionally strong capital inflow. SAFE has already announced that one of its key priorities for this year is to steadily permit a broader range of capital account transactions. The yuan is not freely convertible in terms of the capital account, emphasising once again just how far the currency has to travel before it can become a proper reserve currency. China recognises that one of the most effective tools for reducing the international political and economic pressure on its currency is the opening of the door to the Chinese private sector to invest abroad.

Aussie loses impetus once again. One of the features of the Aussie over recent weeks is that higher levels never seem to last for very long. Overnight the Aussie was again threatening to break above parity, but has since fallen back by more than a full cent from its high and is now trading at 0.9835. For the year-to-date, the AUD is the worst-performing major currency, down nearly 4% against the dollar. There are a number of issues jangling the nerves of traders, including the increasing economic impact of the floods in Queensland. The flood disaster has spread further south to Brisbane, Australia's third largest city. Other worries include signs that Chinese export growth is weakening, Australia's trade surplus is shrinking and that the RBA is now very likely to keep rates on hold in the near-term given the adverse economic impact of the floods. The AUD is not the darling of the fx market right now as it has been over the past two years.