Hardly Calm, but Storm Comin'

The US dollar is beginning what could be a momentous week on generally firm footing. The European finance ministers meet today and RBA, BOE and ECB meet later this week and the US reports jobs data at the end of the week. The Japanese Tankan and European manufacturing PMIs do nothing to weaken growing pessimism about the world economic outlook, but the highest Chinese PMI since May reinforces the soft landing hypothesis. Arguably Australia has become increasingly decoupled from China as its PMI fell further in Sept and now is below 50 for the third consecutive month. At 42.3, it is at its lowest level since mid-20009.

Sterling's 50-day moving average fell below the 200-day average on Thursday last week. It is the first time in about 13-months. It is not a short-term technical signal but reflect the 7.75% depreciation since the middle of August. Support is ahead of the lows for the year set in late Sept near $1.5320. Below there, support is seen just ahead of $1.52, a Fibonacci retracement objective.

The euro's 50- and 200-day moving averages are set to cross today or tomorrow. It will be the first time in a year that the averages will cross. The $1.37 area should now act as resistance. On the downside, the risk extends toward $1.3150 in the coming period, which itself is a retracement objective from the June 2010 low, the last time the euro dipped below $1.20.

The Commitment of Traders did not change much over the past week. More telling is what has happened in the month of September. At the end of Aug the net spec position was long 2.5k euro futures and 11k sterling contracts. At the end of Sept, the respective positions were -82.4k and -64k contracts. Yen and Swiss franc positions were little changed. Positions in Canadian dollar shifted from 8.8k to -20.5k. The speculative positioning was cut in Australian dollar from 43k to 5.2k.

This week's key event, BOE, ECB and US jobs data. The market may be disappointed, which would be sterling positive, if the BOE waits for next month to resume its asset purchases. The speculation has focused on gilt purchases of GBP50 bln, but the BOE has shown a penchant for preferring to take action during months that it releases its inflation review, which would mean next month rather than this month.

ECB may surprise too. Many are still talking about a 25 bp rate cut at Trichet's last meeting. It is possible, though the ECB is likely to focus on liquidity measures, (6-month and possibly 12-month refi operation). Money supply, private credit expansion and the latest inflation readings may prevent the ECB from moving quite yet on monetary policy proper, putting Draghi in an unenviable position.

The US risks disappointing too. The decline in weekly initial jobless claims last week were a bit a of seasonal fluke. The returning striking workers, which had depressed the Aug data may flatter the Sept reading, but the market will quickly look beyond and continue to see lackluster job growth, which impacts income growth and consumption. That said, there is some upside risk to the auto sales figures as Japanese producers return.