• Empire State Manufacturing index -8.8 versus -4.0 expected
  • Initial claims rise 11,000 to 428,000; worse than expected
  • US CPI up 0.4% in August versus expectations of 0.2%; Core as expect at 0.2%
  • Rumor swirls that BOJ checked USD/JPY rates in London/NY
  • ECB announced new swap line with Fed to provide dollar liquidity to European banks over the turn of the year
  • US industrial production rises 0.2%, capacity use rise 0.1%; better than expected
  • BOE’s Weale: Outlook for UK economy worsened since July
  • Philly Fed index -17.5 in September from -30.7 in August; slightly rose than expected
  • IMF worried sovereign debt crisis will spread to banks: Xinhua
  • IMF’s Lagarde: Spending cuts and improved tax collections key in Greece; September tranche will only be released if July 21 reforms are implemented
  • Spain passes Greek bailout, EFSF enlargement
  • Pimco sees EUR tumble to 1.20 in next 3-6 months
  • Belgium’s Reynders: Euro bonds will be issued “some day”
  • S&P 500 rises 1.7% to 1209
  • US 10-year note yield rises 8.5 bp to 2.08%
  • Gold falls $33 to $1787

It was risk-on in a big way today as the Fed, ECB, SNB and BOJ jointly announced the revival of a global financial crisis facility in which the Fed lends unlimited numbers of dollars to the central banks who, in turn, lend it to their domestic banks. Funding pressures in Europe have been acute and worsening in recent weeks and the move to ease immediate funding concerns sent heavily-shorted European bank shares soaring. The euro followed in knee-jerk fashion but stalled after running into trendline resistance at 1.3935. While the near-term liquidity crisis may have been alleviated, the long-term sovereign and banking solvency crisis is still very much in doubt, limiting EUR/USD rebounds.

Sellers are now seen on rallies to 1.3900 while stops are building above 1.3950. Many of the weak shorts have been shaken out on today’s move. On the week so far, we’ve retraced a tad more than 38.2% of the drop from near 1.4550.

USD/JPY bounced early in the US session, boosted by talk that the BOJ was phoning around checking rates with trading desks. A short-covering flurry broke out, taking USD/JPY from the 76.60 area up to 77.34 level after the Fed/ECB liquidity facility was announced as EUR/JPY shorts were jammed as well. We end the day right where we started, now at 76.63.

“Risk” currencies like AUD, CAD and to a lesser extent GBP all recovered with EUR/USD but still trade with an overall heavy tone, a sign that fundamentals have not changed very much. It is more a sign that some short euro positions had become over-extended and needed to be adjusted. AUD ends at 1.0320, CD at 0.9840 and GBP at 1.5800.