FOMC to provide the Light?

These markets are weird, every time one individual sells, another one buys, and they both think they’re smart. There is very little new to say when price action is dead and there are no fundamental changes. All one can hope for is that they have the correct position on. For the third consecutive day the EUR is opening straddling similar prices. However, the market lives in hope that perhaps today may be a game changer as we have US trade and FOMC minutes to contend with. Many expect the FOMC minutes to show a divided committee. The problem with this scenario is that the market will most likely “struggle to assess the balance between those skeptical of further action and those calling for new asset buying.” Perhaps focusing on policymakers’ tolerance for deterioration in labor data will give us the best clue for potential QE3? Investors will also be looking for clues to whether the Fed may look at alternatives such as negative interest rates.

Comments from China’s Wen Jiabao that China needed to strengthen investment could not save Asian equities overnight. They managed to fall for the fifth consecutive day. Even Asian currency movements lacked spunk. The onus is now back on North America as Europe seems to be waddling through their session, with trading fairly much range bound ahead of the FOMC decision later this afternoon. Spanish and Italian bonds managed to ease a touch this morning, despite concerns about possible delays to the launch of the euro’s permanent bailout fund. Perhaps the news that the German constitutional court may need more time before it can rule on the legality of the ESM bailout fund can act a rally inhibitor? The potential of another delay to the ESM approval is only going to hurt the credibility or euro policy makers, again.

Big picture, it’s truly risk off again. Stateside investors are concerned that earnings season is being hit by a global slowdown, following less than inspiring US reports. Depleted confidence coupled with a slowing economy only heightens the QE3 chatter and why the market so desperately seek a clear sign from todays FOMC meet. Ambiguity will have even more investors stuffing their mattresses with cash. Italian Prime Minister Monti stating late yesterday that Italy may ask fellow members to allow the regions bailout fund to buy Italian product to ease borrowing costs has also rattled the market to some extent. Uncertainties do remain despite both the Eurogroup and Ecofin meetings this week assuring the markets that Spain will get +EUR30b for its banks, a reduction in its deficit targets, and that the first tranche of their aid will be made available this month.

Spain announced more austerity measures totaling +EUR65b through to the end of 2014in an effort to meet new budget targets agreed with its euro partners. The savings come from the usual sources. The measures include a hike in the country’s VAT rate, a cut in jobless benefits and state salary cuts. They are doing what needs to be done, perception is everything, it will get Spain its aid. The 10-year bund auction has been seen as a very solid auction with aggressive pricing. Total bids came in at +EUR6.391b and easily covered the +EUR5b total sale. The cash rich and safety conscious environment has again helped offset the pre-sale concession as Bund pricing trades near session highs.

Another corrective overnight but bearish pressures remain. Attempts to lift off the overnight lows have been capped just shy of 1.2300 this morning. The tech charts continue to show that prices are willing to ease again in line with the hourly studies. The short term target remains the up trend line of 2005 which comes in sub-1.20. Technically this bear trend remains intact unless we manage to penetrate last Fridays high above 1.24. The daily’s are oversold and is providing some of this uptick fodder. The OANDA’s retail positions are little changed. They have been buying EUR’s, going long and refuse to pare positions on this dip. Are they an indicator of what not to do? Further EUR weakness is expected as option expiry pressure left hand side continues to build up. Single currency rallies are comfortably sold for now at least.

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EUR to Squeeze Higher?