Consolidative FX Session

The dollar has enjoyed a firmer bias today, but is largely in a consoldiative mode. Two main considerations lie behind the price action today. First, as we noted no one we talked with or seen quoted actually believes the press claim of a secret meeting to denominate the oil in a basket of currencies and gold. Although the report allowed participants to do what they wanted to do, which is to sell the dollar, especially in the aftermath of the G7 meeting that simply repeated their April boiler plate statement about volatility, despite some official comments suggesting a heightened level of concern.

Second, there is some caution ahead of the BOE and ECB meetings on Thursday. The BOE is not expected make any announcement, keeping its gilt purchases the same and not cutting the bank rate (the rate paid on bank reserves). It is now thought that November is a more likely window of opportunity, depending on what happens to economic and monetary data in the immediate period ahead.

The ECB is also not expected to announce a change in policy. There was some firming of euro money market rates today and some speculation that this was in anticipation that the ECB may announce that it was going to reduce in some fashion the liquidity is providing. While possible, it does not strike us as the most likely explanation. If the market really expected reduced liquidity, we suspect the euro itself would be turning in a better performance. Some of the modest backing up in money market rates looks like position squaring in the euribor futures after a big run up--more than 100 bp since early June. The implied yield on the Dec 09 euribor futures is 89 bp after today's 4.5 bp increase, which still seems low compared with the 1% one week repo rate. Ideas that some of the funds being freed up by the 18 bln euro bond in Germany at the may be repatriated may have weighed on the euro earlier, especially against the yen.

In terms of market chatter today, ironically following yesterday's media report, there was talk that Russia continued to intervene, buying dollars for roubles. There was also some talk that Middle East names were selling euros, though of course verification is difficult.

In summary, today's price action looks and feels largely consolidative in nature and likely does not signal a change in the underlying trend.