Dollar And Yen Recovered As Markets Open The Week Lower

Financial markets opened the week mildly lower and helped dollar and yen recovered slightly. In the eurozone, some mixed reports came from Der Spiegel. On a positive note, the newspaper reported that the EU members are planning to allow the ESM to leverage its capital in the same way as the EFSF, so that the former can reach a capacity of more than EUR 2T and to rescue big countries if necessary.

Yet, the newspaper also reported that, albeit preliminary, the troika estimated that Greece has pointed to a budget gap of 20B euro, doubling the previous projection. According to Der Spiegel, the debt-ridden country can only get the next tranche of funding if it narrows the gap. Meanwhile, there were reported that Greek Prime Minister Antonis Samaras has again asked the country's official creditors to take a haircut on the claims to their debts.

When Spain would request to activate ECB's OMT bond buying remains a focus of the markets. ECB executive board member Asmussen said in a newspaper that the "ball in in Spain's court." And he emphasized that "countries now have to meet strict conditions" before the ECB takes any action. Nonetheless, he also hailed that Spain has "done much" with extensive labor market reforms even though "the country must do still more" to restructure banks. German finance minister Schaeuble said last Friday that Spain doesn't need a bailout though. Markets are expecting Spain to announce a plan that focuses on structural reports on September 27, i.e., this Thursday

Another ECB executive board member Coeure said that "the jury is open as to whether there should be another rate cut." He said that a "detailed analysis" is needed about cutting deposit rate below zero would "over into different market segments" and whether money markets could function at negative rates. Also, there could be "limits" to efficiency of further cut in deposit rates.

Coeure acknowledged that the "euro-area economy is weak" certainly with sluggish growth in 2012 and 2013. Meanwhile, inflation is expected to go down but only with a "relatively slow pace." Coeure warned that "is some persistence in inflation data in the euro area that warrants caution". Meanwhile, he said the euro has turned the corner on "confidence" and "perception" and have conditions in place to restore growth.

The China Beige Book, covering the period from August 9 to September 3, showed that growth of manufacturing, trade and retail sales activities decelerated in 3Q12 and may record the weakest annual expansion in 22 years. According to Craig Charney, research director of the survey, "the dramatic and unexpected worsening of the European crisis and slowing of America's economy brought China's export order growth to a near-standstill." The manufacturing sector is found to have the biggest drop in companies reporting higher revenue and higher output. Job cuts are also expected to be more likely in coming months than previously.

Latest CFTC data showed that ECB net shorts continued to droop to 73.5k contracts on September 18, comparing to 93.7k contracts a week ago. That's also impressive comparing to 214.4k net shorts back in June. Sterling net longs seems to be gathering some momentum and rose to 14.4k, up from 4k net shorts. Yen net longs dropped back to 15.5k as yen longs failed to gather momentum above 30k contracts. Australian dollar net long was relatively unchanged at 69.2k. Canadian dollar net longs rose for the eighth straight week to 297k.