Dollar Weakens As Risk Sentiment Lifted By Spain's Budget

Markets responded positively to Spain's plan on budget and reforms as S&P 500 snapped a five-day losing streak. Risk appetite carries on in Asian session and sends most Asian indices higher. Spanish benchmark 10-year yield also dipped below 6% level. European majors and commodity currencies strengthened against dollar.

A detailed schedule on economic reforms was announced in Spain overnight. The plan featured 8.9% cut in government spending in 2013. Meanwhile, increase in sales tax is expected to raise tax income by EUR 5b to EUR 175b. Also, a new independent budgetary authority would be established to monitor government spending. The overall target on deficit to GDP ratio would be 4.5% comparing to 2012's 6.3%. Deputy prime minister Soraya Sáenz de Santamaría emphasized that "this is a crisis budget aimed at emerging from the crisis."

EU commissioner for economic and monetary affairs Olli Rehn hailed that "the reforms are clearly targeted at some of the most pressing policy challenges." Also Rehn said that the plan plan “responds to country-specific recommendations and goes even beyond them in some areas." However, some economists are skeptical on the plan as the plan itself is focused on spending cuts rather than increase in revenues. And the risk of deeper recession in the country, further cuts could be needed. Meanwhile, authorities remained silent on the issue of sovereign bailout for the country.

Greece's coalition government also agreed a plan to cut spending over the next two years by EUR 11.5b. Finance Minister Yannis Stournaras said that the agreement gives me a basis for "stronger negotiation" with the international creditor for easing the conditions on fiscal reforms. Pasok leader Evangelos Venizelos said that the European parts are undoubtedly aiding Greece but "not as much as they could" and he urged European leaders to "acknowledge the achievements of the Greek people," as shown in the elections. Greece has yet to secure the next tranche of bailout fund from EU/IMF and Prime minister Antonis Samaras is seeking a two year extension on fiscal reforms. Stournaras will meet with the troika again on October 1.

The technical development argues that the pull back in European majors against dollar is possibly over. That is, EUR/USD has successfully defended mentioned 1.2816 cluster support level as expected. Main focus for today will be on 1.2970 minor resistance in EUR/USD, 1.6300 in GBP/USD and 0.9327 minor support in USD/CHF. We'd anticipate these levels to be taken out later today or on Monday. Meanwhile, 0.9731 support in USD/CAD and 1.0518 resistance in AUD/USD would be watched closely too.

On the data front, New Zealand building permits rose 1.9% mom in August. UK Gfk consumer sentiment improved slightly to -28 in September. Japan PMI manufacturing improved to 48 in September but stayed below 50, unemployment rate dropped slightly to 4.2% in August, national CPI core dropped -0.3 yoy in August, household spending rose 1.8% yoy in August, retail sales rose 1.8% yoy in August, industrial production dropped -1.3% mom in August. German retail sales, Swiss KOF and Eurozone CPI flash will be the main feature in European session. Canadian GDP and US personal income and spending, Chicago PMI and U of Michigan sentiment would be released in US session.