FX Consolidations As Risk Sentiments Firm, Aussie Underperforms

Risk markets are generally firm in Asia today as supported by last week's QE3 boost. Some consolidations might be today but markets would likely stay in an overall risk-seeking mode. This week, nine Fed presidents would make public speeches and we will get a better understanding of their thinking on their monetary stance and the economic outlook.

In the currency markets, European majors are trading close to last week's high for the moment but some retreats have been seen in commodity currencies. Indeed, the Aussie is underperforming even Kiwi and Canadian dollar. And, we'd expect Euro and Sterling to outperform Aussie and Canadian ahead.

Regarding ECB's Outright Monetary Transaction, the Institute of International Finance warned that the conditionality could "appear as an obstacle to some countries in need, deterring them from requesting support." Also, IIF warned that "termination of bond purchases if a country is perceived to be not in compliance would likely result in a 'cliff effect' and an abrupt market correction." Separately, IIF noted that further delay in reviewing and approving Greece's bailout would be a major event risk and "add to the strains on the Greek economy."

In Spain, Economy Minister de Guindos said that the over EUR 100b austerity measures the country introduced would be "sufficient" in meeting the budget deficit target and the measures are already ""significant and ambitious enough." German Finance Minister Schaeuble acknowledged that Spain "very convincingly" laid out it's on track with its budget and Spain will fulfil its commitments.

Though, he warned that if worsening economic development leads to additional problems, Spain would "take additional measures". EU Economic and Monetary Commissioner Rehn also acknowledged that “Minister De Guindos today expressed very clearly that Spain is ready to take the necessary action to meet the fiscal targets.”

In Australia, RBA's documents revealed that there are as many as 23 global central banks are holding the currency as part of reserves. The documents also noted that "the apparent preference shift and resulting portfolio shift of foreign investors towards Australian dollar government securities has increased Australian dollar demand." And, such "increase in demand associated with this shift appears large by historical standards."

Also, "non-resident" purchase of bonds supported the Australian dollar in recent times, "probably associated with a reappraisal of the relative risks of such investments." Meanwhile, we'd like to point out that recent shift in risk sentiments could also trigger some reverse flows that would limit Aussie's strength comparing to other major currencies, in particular Euro and Sterling.

Latest CFTC data showed that Euro net shorts decreased again to 93.7 contracts on September 11, comparing to 102.3k contracts a week ago. Sterling positions remained relatively neutral with -4.4k net shorts. Yen longs rose slightly from 24.0k to 32.8k contracts. Swiss franc shorts dropped to 9.0k contracts. Canadian dollar net longs jumped impressive from 66.6k to 101.9k contracts, making a new 2012 high. Australian longs rose slightly back from 62.4k t 68.2k.

On the data front, New Zealand westpac consumer sentiment improved to 102.5 in Q3. UK rightmove house prices dropped -0.6% mom in September. Eurozone current account, trade balance will be released in European session today. Canadian international securities transactions and US empire state manufacturing index will be featured in US session.