The greenback registered gains of more than 1% on the day against a number of major currencies, including the euro, the Scandies, the Swissie and the Aussie. Commodity prices also suffered badly – gold has lost nearly 4% since the start of the week, while oil was off 1.5%. Equities fell hard, the DAX down 3.3%, while the bond yields of troubled European sovereigns were once again much higher; the Italian 10yr yield up 30bp at 6.58% at one stage. Apart from the dollar, safe-havens like treasuries, bunds and gilts performed well. Video:

Looking at public sector net borrowing (ex. interventions on banks), the Office for Budget Responsibility gauges this at GBP 122bln for the current financial year, some 11% lower than the GBP 136.7bln outturn in the 2010/11 financial year. On current trends, the UK is on course to meet this, with the first six months showing an 11% improvement vs. last year. Sterling has held up comparatively well, no doubt gaining some benefit from Europe’s growing problems, but the government still has its work cut out ensuring that borrowing is kept in check against the backdrop of a stagnant economy.

European leaders would also be aware of the growing international pressure to put their house in order, with US Treasury Secretary Geithner, the Chinese Premier and Russia’s president Putin all voicing their concerns. To make matters worse for the single currency, Angela Merkel’s party once again fared poorly in regional elections over the weekend in Berlin. Interestingly, the pro-Europe opposition SPD performed rather well. It is the dollar and the Japanese yen that have benefitted most from the euro’s latest tumble. For the greenback in particular, September has been a very fruitful month. Government bond yields for the likes of the US, Germany and the UK are back in the sweet-spot, while equities are once more on the back foot.

This was more a fiscal stimulus plan, rather than a few measure to support the jobs market that was anticipated ahead of the event. It’s a measure of the shift that is occurring right now, away from monetary policy and back onto governments as the central bank toolbox looks somewhat bare.

Some traders were taking profits ahead of Bernanke’s Jackson Hole speech on Friday, no longer so convinced that he will opt for QE3 just yet, which if true is certainly a negative for the shiny metal. Also, some exchanges are starting to increase the margin requirements on gold, making it more expensive for investors and traders. Demand for the precious metal also tends to soften at this time of year. That said the fundamentals supporting gold, namely extremely low nominal interest rates, negative real interest rates and a loss of confidence in currencies as a store of value have not diminished. Gold’s hammering provided stocks with a boost, the DAX up 3.5% at one stage and the FTSE 100 2% higher. Large asset allocation shifts were very much in evidence yesterday, with investors lowering their exposure to both gold and bonds in favour of stocks.

Overnight, some of the Asian bourses have registered significant gains – the Kospi is up 4%, and Taiwan’s Taiex has jumped more than 3%. The gold price has been incredibly volatile – it fell almost $40 after reaching a record high of $1,895 early in London trading, before climbing gradually through the New York session to eventually achieve a fresh new high 0f $1,913.50. The major currencies were relatively becalmed, with only some of the high-beta currencies attracting some buying interest.

However, something is going to have to give for this to happen and there are no signs of this happening yet.  US bond yields are some 3bp higher in Asia trade, the 10-yr just below 3.00% with stocks around 1% softer.  The dollar is only marginally weaker on the main dollar index, but the Swiss franc has surged over 1% since the New York close.  So far, the markets are still betting on a deal being pulled together but it may be that politicians need a kick from the markets to realise the urgency of the situation.  That’s very close to happening if no deal is reached today.

Guest post by www.fxtechstrategy.com

Guest post by Gregor Horvat

Guest post by Gregor Horvat