Week's Key Events Lie Ahead

The US dollar firmed on Friday and those gains have been extended today.   The short-covering advance of the euro last week, helped by the Franco-German support for Greece to remain in the euro and than the new quarterly dollar auctions, ran out of steam.  The longer the euro holds below $1.3720 now, the more likely it is to retest last week's low near $1.3500.  Sterling, for its part has already taken out last week's low, slipping to about $1.5685.   Japanese markets were closed and this helped keep the dollar in a narrow 25 tick range against the yen.  The greenback is also bids against most of the active emerging market currencies. 

There are five key events this week:

FOMC:  The consensus calls for the Fed to extend maturities of its Treasury holdings as a marginal way to provide extra support for the economy.  It could be done actively by selling short-end coupons and buying longer-date maturities.  It could be done more passively by simply buying more long-end bonds with the proceeds from the maturing mortgage-backed securities.  There are a number of other options for the Fed, but this seems the less objectionable.  On balance the less the Fed does, the more dollar constructive it is.  Barring QE3, which continues to seem unlikely, the Fed's balance sheet is not expanding.  The ECB and BOJ balance sheet is expanding. 

Euro-Zone Flash PMI: The euro zone reports a flash PMI reading and the headline activity could have dipped below the 50 boom/bust level for the first time since July 2009.  The report is out Thursday.  The euro zone economy proactively stalled in Q2 after a strong Q1.  Q3 data suggests little improvement and risk of a new contraction.   Slower growth feeds directly into larger deficits and given the current political context, slower growth exacerbates the debt crisis and is euro negative. 

BOE Minutes:  The MPC minutes are released on Sept 21.  The weakness of recent data may have convinced a couple of members to join the dove Posen in calling for easier monetary policy.  In the past, some members have indicated willingness to ease if the economy worsened.  The economy has worsened.  Sterling is faring better against the euro than the dollar.   Initial support for the cross now is seen near GBP0.8630-60. 

Finland  EFSF Debate:   Finland begins the debate on the EFSF reforms on Sept 21.  It may take another week to conduct the actual vote.    The EFSF reforms were hoped to be approved quickly, but it looks like it can still be the better part of a month away, and even then it does not appear to be a panacea. 

Swiss Data:  The SNB reports money supply data on Wednesday.  Putting a ceiling on the franc is costly in monetary terms.  Money supply is likely to have risen.  However, what policy makers are likely most interested in in credit and mortgage growth.  Will the easier monetary policy create inflation or a bubble in financial assets ?  Remember in the past, when the SNB has tried doing this sort of thing, it has ended when with the rise in inflation.  On Friday, the Swiss report August trade figures.     If the dollar can hold above CHF0.8750-CHF0.8800, another run at CHF0.9000 seems likely.    Euro-franc continues to trade in fairly narrow ranges, keep volatility soft, suggesting not much interest currently in challenging the SNB.