EUR and FED Event Risk Dominates

Historically the first trading day after a NFP release tends to be the slowest and most boring of trading days in that month. So far, this Monday has not disappointed, as Capital Markets prepares for an intense event laden week. With no economic data of note scheduled, the focus inevitably will turn to event risks later on in the week. The Fed will conclude its two-day rate meet on Thursday and after Friday’s disappointing payroll print, the market now expects an extension of the Fed’s low-rate interest guidance and a reactivation of its AP program. Confirmation of new QE measures should be moderately negative for the USD, most notably against the JPY.

For the Euro-zone, the German constitutional court ruling on Wednesday will be the main focus this week. If the ESM laws are upheld, the event will pass with only modest additional benefit for the single currency and risk sentiment. However, a ruling against the legislation would likely represent a major risk aversion and systemic stress event. The fall out will be seismic in nature and be be felt for years to come. The market does not expect a ruling against the treaty. It should be a rubber stamped foregone conclusion, however, do not be surprised to see additional condition being attached relating to parliamentary approval of future aid decisions. Should the constitutional court uphold then one of the key event risks this month will be removed, leading to investors to take off hedges and support a broader risk rally.

Moody’s, the credit rating agency is again attempting to overstep its primary objectives and that’s “rate.” Too often rating agency want to also be heard on the political circle and seem rather proud to hear their won voices. This morning is no different, with Moody’s stating that they “see little new in the ECB’s bond buying program.” Apparently the plan “leaves a number of uncertainties,” not very original, but safe for them to state the obvious. The rating agency has concluded that they “do not expect the plan to resolve the Euro debt crisis.” This is very much a sobering thought of theres, very few would have come up with eureka comment!

A raft of disappointing data out of China has managed to contribute to a more subdued opening to the week. Chinese economic data released over the weekend showed that IP continued to slow last month, up +8.9% on the year compared to July’s +9.2% rise, its lowest rate in three-years. The Consumer Price Index on the other hand added +2.0% on year, up from +1.8% in July. It seems that the chances are growing that the country will miss its official +7.5% growth target for this year. Exports grew +2.7% in August, below the +3% expected rise. Exports generate +25% of the country’s GDP and support an estimated +200m jobs. Imports fell -2.6%, confusing exports, who expected a +3.6% rase. The trade data is being considered some of the worst since the “depth of the economic crisis,” and has prompted President Jintao to warn other regional leaders that some “grave challenges face economic growth.”

It’s really no fun to be squeezed out, and we have see this happen to many weak EUR shorts since last Thursday. However, if you are not going to be squeezed why not sell some more? If you liked been short at 1.26 then you got to love it at these elevated prices (1.2780-1.2825)? That is what the retail sector is telling us as they are willing sellers of the single unit on upticks. The techies managed to get themselves long after breaking the old-treble top resistance of 1.2638-45, looking for gains ahead of the 1.2810 (61.8% retracement 1.3284-1.2042 down leg). The market has been able to take some of those winning positions off the table. The 30-day lower and upper bollie-bands are diverging, this is indicative.

Other Links:
NFP to Give us QE3?