Euro Drops, Optimism May Fade Ahead of FOMC

The risk rally continued on Friday but the euro declined on Greek worries and after Geithners trip to Europe fell flat. We expect this week's FOMC meeting to produce an inadequate policy response. See Ashraf's Premium Trades below. NZD and CAD led while CHF and EUR lagged. Fridays CFTC report showed the USD gaining favour. CFTC & weekly levels below.

Geithner traveled to Poland and spoke for 30 minutes to EU finance ministers in what appears to have been a one-way exchange. European leaders reacted petulantly to the speech. Austrias fin min said it was peculiar that Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and that he expected Geithner would listen to what they had to say.

The exchange appeared to have little effect on markets but underscored the difficulty of US-European political cooperation.

Greece was in focus but Eurogroup meetings appeared to fall flat with decisions about Greece postponed until early October. A report said Greece will hold a conference call with the troika on Monday to ask that bailout funds be accelerated due to cash shortfalls. EUR/USD fell slightly below 1.38 early in London trading and stayed in that range for the remainder of the day.

The UMich consumer sentiment survey for September rebounded to 57.8 from the August reading of 55.7. This was slightly above the 57.3 consensus.

Gold gained $31 to $1810, Silver gained $1.22 to $40.73 and oil fell 1.51 to 87.89. The S&P 500 rose 7 points, or 0.6%, to 1216 and climbed 5.4% on the week.

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Weekly Charts

USD/JPY closed the past six weeks at virtually the same level (76.76). The bias remains strongly to the downside here but we need to see a close below 76.00.

Cable had its lowest close since Jan. 2. If it didnt bounce with the risk rally this week, it should continue to fall.

USDCAD firmly rejected parity but the bias isnt outright bearish until a close below 0.9723. Oil also needs to get above $92.

Without knowing that stocks rose all five days this week, we might be tempted by the AUD chart. Knowing the risk profile, there isnt a case for AUD longs here.

EUR/USD looks like a standard retracement after a breakdown. If you were selling bounces, there may be another bounce to sell.

Gold and silver both respected the weekly, upward trendlines.

CAD and EUR were the top performers on the week; AUD and GBP lagged.

CFTC Commitment of Traders

The overall USD position is now nearly flat as the dollar made gains against every currency except JPY. AUD, NZD CHF and JPY are in net long position while EUR, GBP and now CAD are held short. The net yen long increased 2K to 35K. EUR shorts increased 18K to 54K. GBP shorts climbed 18K to 26K. Despite CAD gains, traders pushed it into a net short position at -8K from +2K a week ago. Its the most bearish CAD position since mid-2009. AUD longs fell 11K to +37K and NZD positioning was unchanged at +18K.