Investors continue to look to the Euro-region for direction overnight with global markets responding favorably to Spain’s budget cuts amid speculation China may soon take further  steps to stimulate the economy. We’ve seen a return of the risk trade with the Kiwi leading the charge higher despite against the greenback with the Aussie dollar also finding some form after a mostly negative week. In what many see as a precursor to an eventual bailout, Spain announced a series of economic reforms designed to cut spending rather than heavily targeting revenue. Cuts to spending will equate to 0.77 percent of GDP, while revenue based cuts will account for a smaller 0.56 percent.

Market participants are looking at the reforms in the context of the ECB’s bond-buying plans, which can only be of direct benefit to Spain should they formally seek a sovereign bailout while meeting “strict and effective conditionality in line with the established guidelines.” While we may have seen markets respond positively, it’s clear any short-term positivity is tentative at best as investors wait for the result of Friday’s Banking stress test to ascertain the condition of Spain’s banking sector. With a quarter of the population unemployed, the governments ‘means to an end’ reforms won’t be viewed as such by the people, with further austerity threatening to pull many below the poverty line.

Earlier in the UK, sterling strengthened after a better than expected GDP release which  fell 0.4 percent in the second-quarter, a slightly better revision from previous estimates of a 0.5 percent fall. In yearly terms, the UK economy contracted 0.5 percent.

Across the Atlantic, investors found solace in Spain’s reforms which offset a round of mostly negative data while conjecture surrounding near-term Chinese stimulus underpinned gains. Durable goods orders fell 13.2 percent in August down from a previous rise of 3.3 percent and in excess of the expected fall of 5 percent. US GDP was revised lower from 1.7 to 1.3 percent growth in the second-quarter, to represent growth of 1.6 percent in yearly terms. A drop in the weekly jobless claims was a concession to the negative round of data with claims rising by 359,000 in the week ending Sept 22, outpacing estimates of 375,000.

The greenback fell against major counterparts with risk trends favoring risk currencies such as the Aussie and Kiwi, while the Euro once again broke the upside of 1.29-figure.  After falling to lows 103.27 earlier this week, the AUDUSD pair strengthened on speculative flows after yesterdays disappointing industrial production data added weight to reports China may soon unveil stimulus measures designed to prop up equities markets. Local data in focus today includes private sector credit for August, while further conjecture over the likelihood of near-term stimulus from China will remain a key directive with the HSBC manufacturing PMI scheduled for release this afternoon. At the time of writing the Australian dollar is buying 104.45 US cents.

The focus remained squarely on peripheral Europe overnight with social unrest in Spain and Greece weighing on global markets. As Spain prepares to announce a series of economic reforms, demonstrators in Madrid have used the opportunity to voice oppositions on what will essentially come at the expense of the people. Spain’s Central Bank issued a statement overnight noting third-quarter growth is likely to continue to carry the country deeper into recession, with output continuing to fall at a “significant rate.” To make maters worse, the politically autonomous region of Catalonia has also called elections on November 25, in what is effectively a referendum on independence from flagship Spain. Catalonia’s leader, Artur Mas stated in a news conference last week, “The people and society of Catalonia are on the move, as we have seen on Sept. 11, and not willing to accept that our future will be gray when it could be more brilliant.”

After considerable progress in recent weeks on the back of Mario Draghi’s grand bond buying proposal, markets are begging to price-out some of the optimism seen in recent weeks with 10-year Spanish debt yields back above the 6-percent region. The perceived safety of the Greenback and Yen remained the place to be, with still little in the way of post-QE3 optimism to negate the latest downturn.

The Yen remained the safe-haven destination of choice despite recent efforts by the Bank of Japan devalue the currency through monetary easing. Past BoJ efforts to dull the Yens appeal have proven unsuccessful, and despite flooding the market with an additional 10 Trillion Yen, this latest effort, once again, appears to have provided little respite. BoJ board member Takehiro Sato comments yesterday also failed to take some of the sheen off the Yen despite stating the bank “won’t hesitate” in taking further monetary easing initiatives. While its possible markets will continue to test the banks resolve, we’re likely to see reluctance to carry the USDJPY pair below the 77-handle given the threat of monetary and currency intervention.

The Australian dollar continued to underperform in early Europe, but managed to regain some composure throughout U.S trade, returning from lows of 103.27 US cents. Economic data due in domestic trade  includes August Job vacancy numbers with China’s industrial profits -  both are scheduled for release at 11.30am AEST.

Demand for risk reversed throughout the US session overnight with global growth concerns remaining a key directive for overall risk trends. Broad-based negativity was compounded after Fed Philadelphia President Charles Plosser made perfectly clear his view the Fed’s latest stimulus effort carries more risk than merit, noting “We are unlikely to see much benefit to growth or to employment from further asset purchases,” while adding the risks associated “could prove quite costly to the economy.” Charles Plosser is not a current voting member of the Federal Reserve.

Nevertheless, there were some bright spots throughout the session in terms of data releases with US consumer confidence outpacing expectation to rise to a 7-month high and a solid housing report with the Case-Shiller home-price index increasing for the third consecutive month, adding credence to the view the US housing market is in a recovery phase.

It’s clear QE3 has taken a back seat to broad negativity surrounding growth prospects with investors focusing on fundamentals rather than the short-term merits of QE3. It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously, while a steep dollar sell-off in the lead up to QE3 may indicate any optimism was well and truly baked in. Nevertheless, there’s a good portion of the market waiting for a second wind with a valid case to suggest markets have priced a fair degree of ‘bad news,’ and a return to a stimulus-focused market is imminent.

The Japanese Yen led safe haven offensive higher with the greenback close behind coinciding with a drop from key risk barometers such as U.S equity markets.  After trading to highs of 1.2972 earlier, the Euro retreated over the course of trade to current levels of $US1.2910. A move to the perceived safe-haven units came at the expense of the Aussie dollar after peaking at highs of 104.63. In the absence of local market moving data today, we anticipate regional equities will continue to provide direction for risk currency trends in the domestic session. At the time of writing the Australian dollar is buying 103.8 US cents. The DEWR Internet Skilled Vacancies is scheduled for release at 11am AEST.

Global markets remained transfixed on a series of negative themes from the Euro-region overnight, promoting a moderate risk-off market demeanor. The greenback and Yen found support against major counterparts initially driven higher by disharmony between France and Germany over how soon the Banking Union could be established. In addition, markets focused on the latest IFO data series which showed German the business confidence gauge fell to lows not seen since early 2010. Spain also remains a key point of contention for markets as Prime Minister Mariano Rajoy remains silent over if Spain will soon formally request a bailout. Meanwhile, Greece continues to bubble away in the background as investors wait in anticipation for a troika report which will ultimately decide if Greece will receive its next bailout instalment.  There’s some speculation the report won’t be released until after the U.S elections in early November to avoid placing President Obama’s re-election hopes in jeopardy should market adversity strike.

Despite recent stimulus efforts by central banks from both sides of the Atlantic to shore up confidence, growth concerns continue to undermine an extension of the risk rally seen in recent weeks. Spanish debt yields were pushed higher amid reluctance from PM Mariano Rajoy to formally request a bailout which threatens to place his own political fortunes in danger ahead of a key regional election on October 21. It’s clear Rajoy is facing the precarious decision between easing the financial burden by requesting a bailout and the effective loss of sovereignty given the strict conditions attached.  For now it appears Mariano Rajoy is taking it all in his stride, but markets will be transfixed on possible outcomes, in-turn a key directive for the Euro.

The Euro continued to reflect this range of negative themes briefly falling below 1.29-figure before finding moderate support in the US session. The US dollar’s safe-haven credentials kept it buoyant against major rivals with the NZD leading risk currencies lower. After falling to lows of 103.85, the Australian dollar was able to gain some upside support over the course of the U.S session, once again making a break to the upside of 104 US cents. Interest rate speculation dragged the Aussie dollar lower yesterday after Treasurer Wayne Swan delivered the final budget outcome for the 2011/12, which showed falling commodity prices and tax revenue may hamper his efforts to return the economy to surplus this year. Local markets will continue to focus on the Reserve Banks next move today with the Financial Stability Review scheduled for release this morning. Also at 11.30 AEST RBA Assistant Governor, Financial Markets, Guy Debelle will be speaking in Melbourne. There’s a valid argument to suggest the RBA’s next move may indeed be to cut rates, and market will be focused on both events for further evidence the bank may decide to do so in October.

U.S stocks finished the week in unspectacular fashion on Friday with the S&P paring earlier gains to finish flat on the day. Speculation surrounding a possible Spanish bailout request provided some positive momentum early in the session after reports surfaced Spain is planning to undergo a series of reforms in an effort to qualify for financial aid. According to the reports, Spain will increase the retirement age and freeze inflation-linked pensions in order to bridge the gap. The very notion Spanish authorities may embark on further austerity measures triggered speculation that authorities may be preparing to formally request a bailout, a key condition to receiving direct assistance from the European Central Bank’s grand bond buying venture. Earlier this month, ECB President Mario Draghi outlined his plan to aid peripheral debt markets by making “outright monetary transactions,” (OMT’s) in the secondary debt market. These OMT’s will not have a predetermined size, suggesting the ECB could make potentially unlimited purchases in an effort to reduce peripheral borrowing costs. Since then the baton has been handed to Spanish PM Mariano Rajoy to balance the benefits of the program at the expense of the nation’s sovereignty, which will require Spain to adhere to terms set-out by the troika by accepting a bailout. After briefly returning above $US1.30, the euro pared gains through US trade posting the first weekly decline in six weeks. The Aussie followed a similar path with an earlier break of 105 US cents failing through US trade to close at 104.5 US cents.

The week ahead will see the focus remain on Spain amid a host of top-tier data points from Germany. Across the Atlantic, market participants will continue to looking at the incoming data pulse in the context of QE3 and while we have not yet seen the psychological benefits realised any stronger than expected data points may see the merits of QE3 begin to infiltrate market pricing.  It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously. Nevertheless, risk trends will continue to guide the greenback’s fortunes over the course of this week, and market participants will be focused on the U.S data pulse for the answer.

Among a host of Fed manufacturing gauges, the focus early this week will be consumer confidence and housing data with second-quarter GDP, durable goods and personal consumption data the primary focus in the latter half of the week. It is clear the greenbacks best hope to build on last week’s gains is a fully fledged return to a risk-off environment. Importantly, with markets yet to fully enjoy the short-term benefits of QE3, moderately positive data may spark a significant bounce across the risk spectrum with the US dollar first in the firing line.

Global markets remained capped under the weight of negativity surrounding China’s growth prospects overnight, with yesterday’s HSBC flash PMI compounding concerns the world’s second largest economy won’t be there to break the fall of heavy weight’s Europe and the United States. The Negativity was exacerbated after Euro-Zone composite manufacturing PMI fell to 39 month lows in September, amid continued concerns over the future of Spain. Solid demand for a sale of Spanish debt at auction failed to reignite a sustained sense of optimism despite the 10-yr benchmark fetching a yield of 5.7 percent, down from 6.7 percent in a previous auction. Political uncertainty in the region has overshadowed Spain’s reluctance to request a bailout, with the autonomous region of Catalonia launching a push to separate the region from the rest of Spain. Catalonia’s leader, Artur Mas stated in a news conference, “The people and society of Catalonia are on the move, as we have seen on Sept. 11, and not willing to accept that our future will be gray when it could be more brilliant.”

A series of negative themes helped the Euro to break the downside of $US1.30 amid a broad based reprieve from the U.S dollar signally growth concerns are overshadowing the recent stimulus-offensive unveiled by the central banks of the U.S and Europe. After last week’s post-Fed slide, the greenback has begun to show signs of life with its safe haven properties kicking into gear against its risk counterparts. Concerns of China’s economic stability also took priority in the U.S despite a moderately better Philly-fed index which fell 1.9 index points in September, against a fall of 7.1 in August, suggesting the pace of the fall in manufacturing activity is slowing. Economists’ had anticipated a greater fall of 4.5.

The Australian dollar succumbed to Chinese concern breaking the downside of 104 US cents late yesterday, before paring losses over the course of U.S trade. Value traders moved in after the Aussie fell to lows of 103.66 US cents late yesterday and began to grind higher in the U.S session alongside equity markets.  In the absence of local data, we anticipate regional equities to remain the key driver for the local unit in the domestic session. At the time of writing the Australian dollar is buying 104.3 US cents.

Risk currencies remained buoyant overnight held up by better than anticipated U.S housing data, amid a moderate bid tone spurred on by the Bank of Japan’s latest stimulus announcement. A return to risk kept the Aussie dollar in favour overnight after notable selling through the early part of the week. The Aussie dollar rose to highs of 104.98 before retreating over the latter part of US trade.

USDJPY peaked at 1-mont highs above ¥79 after the Bank of Japan increased monetary stimulus to the tune of ¥10 Trillion to total 80¥, but the greenbacks time in the sun proved to be short lived, with the pair falling over the course of U.S trade. Efforts by the Bank of Japan to fight the Yen’s ascent initially created a key inflection point for risk currencies such as the Aussie and Euro, but these efforts failed to see sustained upside momentum, with the AUDJPY pair resuming a downward trajectory to ¥82 after earlier highs just shy of ¥83. The BOJ’s plight to take dull the Yen’s sheen has thus far proven unsustainable, with Japans exporters using a decline in the currency as on opportunity to repatriate funds bank to home soil.

With the Bank of Japan now joining the stimulus party alongside heavy weight central banks the Fed, and ECB, we’re seeing fundamentals – for the most part -  subordinate to easy money in what has been described as a race to the bottom, reminiscent of the ‘currency wars’ of 2010. That said the European Central Bank’s latest efforts to restore confidence in the region have worked in favour of the Euro given its recent return from the doldrums after Mario Draghi’s latest bond buying venture. The Bank of England have also maintained their penchant for monetary stimulus with the September meeting minutes noting some members felt that “additional stimulus was more likely than not to be needed in due course,” strengthening the case for another £50 billion to be added to the £375 billion asset purchase tally in November.

Locally, it’s another quite day in terms of scheduled releases with the RBA FX transactions due for release at 11.30, but the release of the HSBC Chinese flash manufacturing PMI will be the key driver of the Aussie in domestic trade which is scheduled for release at 12.30 AEST. At the time of writing the Aussie dollar is buying 104.7 US cents.

In contrast to the barrage of major market moving themes seen in recent weeks, we’ve seen little in the way of top tier directives to keep the upside momentum alive. Despite a well-attended debt auction overnight, we’ve seen the focus shift back to Spain as investors await news if the Rajoy Government will ask for a bailout in order to qualify for the ECB’s bond buying scheme. In recent weeks we’ve seen the Euro propped up by the prospect of ECB intervention, and while this may remain a critical pillar of support, reluctance from Spain to formally request a bailout appears to dampening enthusiasm. Despite a slightly better than anticipated German ZEW release, the Euro continued to grind lower overnight with a break to the downside of $US1.31 before bottoming out at $US1.3028.

Across the Atlantic it appears the Fed’s inspired rally seen last week has all but faded with risk barometers such as U.S stocks largely flat on the day. The Australian dollar has remained under moderate pressure overnight amid a lack of positive directives to keep the upside momentum alive. The ensuing period of yesterday’s RBA minutes release was moderately supportive of the local unit for a short period before grinding lower in the latter part of the domestic trade. The minutes demonstrated the board has the breathing space to further support the economy noting “the current assessment of the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth.” The minutes also acknowledged the implications of the high Aussie dollar, noting the high exchange rate was “weighing more heavily on the economy than might be expected.” In short, there is a valid case to suggest the RBA’s next move could indeed be to cut rates; nevertheless it is also clear the board are reactive to the incoming data pulse which may not cement the case for further monetary easing in time for a November rate cut.  Both macro and anecdotal evidence continues to point to diminishing growth prospects in China, amid a reluctance from monetary authorities to embark of further easing initiatives given the risk of reigniting inflation. There’s also a sense the Peoples Bank of China may hold off on new stimulus measures in response to the Fed’s latest quantitative easing venture. It’s clear the Aussie dollar as a proxy to China continues to reflect this negativity.

Locally, we have the Westpac leading index on the docket at 1030 AEST which we anticipate will have very little effect on A$ price action in the domestic session. All eyes will be on the Bank of Japan who will wrap up their 2-day policy meeting, which is widely expected to see the bank announce further stimulus measures in an effort to boost their export-contingent economy. The decision is scheduled to take place at 1300 AEST.

After last’s weeks Fed-induced slide, the US dollar continued to win back ground overnight with commodity bloc currencies leading the decline across the risk spectrum. Liquidity was lighter than usual with investors taking a breather after last week’s pandemonium, amid a drop in participants in light of the Jewish New Year holiday. This week’s US economic docket is also sparse in comparison to previous weeks with a range of mid-tier housing data the primary focus ahead of Thursday’s Philadelphia Fed index. The latest New York Empire Manufacturing index slid to -10.41 in September from a previous -5.85, adding credence to the Fed’s decision last week to unleash new easing initiatives. A steep short-term drop in the price of crude oil provided a positive back drop for the inversely related greenback to build on gains.

The Australian dollar led commodity currencies lower with the AUDUSD pair falling back below the 105-figure after peaking above 106 US cents on Friday. Sterling bucked the trend with cable remaining supported above $US1.62 but stopped short of breaking 4-months highs just above $US1.63. The Euro softened but remained supported above $US1.31 with little in the way of fresh directives to spur a move from its current range.

Despite moderate easing across risk currencies this week, the overall market demeanor remains US dollar-negative, with the latest commitment of traders report shows US dollar positioning turned net short for the first time since August 2011 as of Tuesday last week. A latter week risk-offensive added to the short-side appeal of the U.S dollar which we anticipate will be strongly reflected in next week’s COT report.

If we look past the immediate psychological merits of QE3, there’s a valid case to suggest the greenback may not need to endure an extended period of decline seen after Fed intervention in the past. Overall, recent price action shows the Fed have appeased short-term expectations, however, unlike the Fed’s first two rounds of quantitative easing, we cannot draw any finite conclusions on the total size and duration of QE3, accept the Fed will buy mortgage-backed securities at a rate of $US40 billion per month and will continue to do so “if the outlook for the labor market does not improve substantially, “in the context of price stability.” It is also possible markets have developed immunity to each new round of Fed easing, suggesting the impact will be less of a shock then previously. In addition, should the U.S data pulse take a positive turn, whether you attribute these to QE3 or otherwise, markets may begin to price-out QE3, suggesting the impact will be softer than that of the Fed’s previous stimulus efforts. Nevertheless, it’s a question of timing and it would be a bold move to begin preempting a material shift the upside for the greenback at this very early juncture.

The day ahead will see the RBA policy meeting minutes for the September meeting take centre stage. The committee left interest rates unchanged at 3.5 percent with the ensuing statement taking a tad more of a neutral tone than markets had priced in.  The statement acknowledged weakness from recent Chinese indicators, which is a delicate downgrade from the August statement which noted “China’s growth has moderated to a more sustainable pace, but does not appear to be slowing further.”  In essence, the statement justified why interest rates are below their medium term averages, rather than building a case for additional cuts to the official cash rate.

At the time of writing the Australian dollar is buying 104.75 US cents.

After many months of speculation, the FOMC finally took the plunge and announced they will embark on a third round of quantitative easing, with the committee deciding to purchase additional mortgage-backed securities to the tune of $40 billion per month. In addition, the Fed will continue its existing program known as operation twist while extending its policy to reinvest maturing agency debt and mortgage-backed securities.  The Fed’s forward guidance was also extended with the statement showing the committee believes “exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.” In previous correspondence, the Fed had forecast exceptionally low rates through mid-2014. The Fed noted the reboot of its asset purchases should put “downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

Although the decision was warmly welcomed by markets, the committee failed to provide markets with finite details on the purchases such as the length of time and total size, stating “determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”As anticipated, Richmond Fed President Jeffrey Lacker opposed additional asset purchases while also preferring to omit the forward guidance.

The clear loser out of the Fed’s latest efforts is of course the U.S dollar, which is innately averse to what market’s see as an unsterilized dilution of its core value.  Whether the Fed’s third round of easing will translate to job creation remains to be seen, however its psychological merits are abundantly clear with equities, commodities, and risk currencies responding in kind. Market’s had broadly anticipated Fed action in today’s meeting which took some the sheen of the ensuing rally, nevertheless, it’s a clear win for those long risk ahead of the decision.

The euro move to fresh 4-months highs against the greenback, but failed to make a break to the upside of $US1.30 while the Kiwi lead the commodity bloc offensive higher, peaking at 83.24 US cents in recent minutes. The Aussie dollar once again crossed the 105 US cents barrier but had little left in the tank after topping out at 105.7 US cents. With little in the way of local market moving themes, risk currencies will rely upon residual support in Asian trade with regional equities likely to set the pace as investors react to the Fed’s latest efforts.