Greenback support

The Greenback has rallied so far this week despite expectations
for weakness following the Fed’s announcement of QE3. It virtually
appears to be a case of sell on rumour, buy on fact. Admittedly the
USD usually does weaken following QE with the USD index falling
during the full periods of both QE1 and QE2 (-4.6% and -2.9%,
respectively).

The contrasting argument in provision of a stronger USD which
appears to be supported by the massive decline in USD positioning
over recent weeks and over 5% drop in the USD since 24 July is that
the market has already priced in a lot of QE expectations into the
currency.

Furthermore it will likely play positive for the Dollar the fact
that the Fed is not alone in increasing its balance sheet. Many
central banks are striving to uphold very easy monetary policy. The
consequence of this is that there is a battle of the balance sheets
in progress that does not necessarily involve the USD being the
underdog.

EUR/USD has dropped well off its recent highs around 1.3173,
with emotion for the currency souring due to fumbling by the
authorities in Spain on requesting a bailout and disparities over
how to proceed on several issues including banking supervision. The
drop in the September German IFO business climate survey, the fifth
in a row, did little to help the EUR, with the survey adding to
Eurozone growth worries. Gradually it looks as though single
European currency short covering is running its course and while
there may yet be a further bounce in the EUR should the ECB begin
its bond purchase program, the near term outlook is more
fragile.

Elsewhere five of the UK’s biggest lenders have signed up to the
‘funding for lending’ scheme which has been designed to encourage
activity in the economy by making cheaper loans to firms and
individuals. The only bank who didn’t require the funding was HSBC
claiming it doesn’t require the additional funding. Paul Fisher,
the Bank of England’s executive director for markets, said that a
“significant number” of other banks and building societies were
close to signing up. “I am confident that the FLS [Funding for
Lending Scheme] will help the supply of credit,” he said. “Before
its introduction, it was more likely than not that the stock of
credit would contract further over the next 18 months.”

Today is a quiet day but we have German Inflationary data where
we are expecting a figure of 2.1% down from 2.2% last month. This
is ahead of UK GDP tomorrow where another negative of -0.5% is
anticipated.