FXstreet.com (Barcelona) - The recent shift on tail risk
perceptions from last week has remained intact through Asian hours.
Weak Chinese economic data over the weekend had a muted impact,
offset on the back of well greeted ECB funding plans, Fed's QE3
being at a stone's throw and the approval by China to invest over
150 bln USD worth of stimulus through infrastructure projects.
The elimination of short term risk premia in the FX market has
fortified the notion of a market more prone to let risk swing to
develop, best reflected by the broad USD weakness across the board,
undoubtedly weighed by a further, and perhaps last, round of
disccounts before QE3 becomes a reality. It seems as though most if
not all QE3 has been priced in at this point, an idea defended by
Standard Chartered analysts, noting "even if QE3 happens, it
actually may mark the end, not the beginning, of USD weakness."
Expect to find plentiful Monday dip buyers
The charting story, as it reads this Monday, reflects a market
prone to take on further risk after the key technical breaks from
last Friday. However, for those savvy traders aiming to get decent
risk/reward plays, patience may be required after the somewhat
overdone rallies from last week.
As noted by John Noonan, Head of IFR Markets, "it is likely the
better news out of Europe and hopes of more action from the Fed and
Chinese officials will keep risk assets and risk currencies buoyant
and Monday morning dips should be buying opportunities."
Price action indicates EUR/USD on track to build on more
At the moment, little to none evidence exist the market is hinting
at any turnaround of the current bullish technical moves. As Marc
Chandler, Head of Currency Strategists at BBH, notes: "There are
many who are now talking as if a major corner has been turned.
We remain suspicious and continue to look for technical
evidence that will help signal an end market trends that began 2-3
months ago. Yet to be clear, and anticipate our argument
below, such evidence remains elusive."
Even UBS strategists, notorious USD bulls for most of 2012, have
finally made a move in their forecasts, suggesting that "for now
QE3 speculation will keep the dollar on the backfoot. But foreign
exchange participants will need to see what scale of easing the Fed
agree upon and also how other major central banks will respond."
Shaun Osborne, Chief FX Strategist, and Greg Moore, FX Strategist
at TDS, amid the latest avalanche of bulls entering fresh
positions, are also out with a client note ruling out its recently
pro-USD buy strategy: "We have to abandon our long-held bearish
view of EUR/USD in the light of the latest technical developments."
"Short-term trend momentum has turned obviously EUR-bullish (and
longer-term studies are turning mildly constructive as well),
suggesting that a deeper retracement yet is likely to be seen,"
Shaun and Greg add.
Spanish bailout request: Will it take a sell-off for Rajoy
to plea for help?
Another hot issue in the horizon embraces the timing for Spanish
Prime Minister Rajoy to formally request assistance from the EFSF.
At this point, it seems as though it is a done deal that Spain will
tap the EZ aid fund despite the country's abstinence to loose
significant sovereignty. The question is whether or not Rajoy will
wait for a new selloff in Spanish bonds till applying for
As UBS notes: "IMF monitor the reforms of any government receiving
EU support will make it even less attractive for Rajoy to go to cap
in hand to Brussels. As such it may take a rebound in yields and a
reversal in stocks to force Spain's government into a full
bail-out. Similarly, Italian Prime Minister Monti is also unlikely
to apply for EU assistance. But as his mandate runs out in six
months time now, Italian government bond markets may start to worry
about who will succeed Monti next spring."
German court ruling, Dutch elections on Sept 12
In the early part of the week, not significant risk events are
scheduled until Tuesday, when Germany's Constitutional Court ruling
on the €500bn European Stabilisation Mechanism to beef up the funds
of the EFSF, is due. Consensus amongst market participants is for
an outright approval, with very few factoring in risks of
Similarly, Dutch elections will take place on the same day,
although as UBS strategists explain, "should not present too much
risk to the euro for even if anti-bail out parties triumph, it may
take months for a new coalition government to be formed."
FOMC meeting eyed: Will Bernanke resume asset purchasing
The other major event of the week is the FOMC meeting on Friday.
The policy meeting is awaited by a growing number of banking
institutions having turned notoriously dovish. Wesptac, for
example, portrays pretty accurately this sentiment, expecting the
case for easing action as soon as this week now, after Friday's
weak August payrolls data.
According to the bank, "a loose consensus is building around an
extension of the extended period forward guidance from late-2014 to
late-2015 and a flexible open-ended asset purchase program,
probably MBS, at roughly the pace of previous purchases- around
$60bn per month."