• Goldman economist: Fed won’t do QE until unemployment hits 10%
  • US monthly budget deficit below expectations at $90.5 bln in August, down from $103.5 bln a year ago
  • German FinMin: Basel III will not hurt recovery
  • Congress pushing for action on Chinese currency manipulation
  • S&P 500 rallies 1.1% to 1122, closes above 200-day moving avg
  • US bond yields buck risk aversion, fall in yield to 2.74%

The strong Chinese data and relief that the Basel III accords will be phased in over time helped fuel a further rally in “risky” assets. US equities opened higher and maintained a strong tone throughout the session. Commodities rallied sharply as well, with the CRB up 0.9%. The US bond market bucked the trend, falling in yield, rising in price despite strength in asset markets.

EUR/USD rallied from just above 1.2800 at the US open to take out London highs in the low 1.2830s before pushing on to 1.2893 at its peak. 1.2920, the September 6 high is the next hurdle for the single currency. Friday’s Hypo Real Estate headlines seem like ancient history with the market shrugging them off and closing nearly 200 pips higher than we ended last week.

USD/JPY was offered for much of the US morning, falling back to 83.50 on reports that PM Kan will likely eek out a victory despite Ozawa’s popularity within the Diet. Kan is seen as less likely than Ozawa to intervene in currency markets.

A mix of bids and stops are seen from 83.50 on down to 83.00 roughly every ten pips, traders report. rallies were very shallow in the NY afternoon, not eve reaching 83.70.

GBP underperformed the EUR today as is often the case when EUR/USD is rallying. Swiss demand for EUR/GBP was rumored during the session while selling interest from a UK clearing bank was a prominent feature of the early hours of the session.

USD/CHF slumped on broad dollar weakness today but it did not challenge the key area of support at 1.0060/65. Talk of a 1.0050 barrier made the rounds again. SNB selling of EUR/USD was absorbed on this morning’s rally.

AUD/USD and CAD were huge beneficiaries of the Chinese news over the weekend. AUD surged as high as 0.9361 and USD/CAD fell as low as 1.0265. USD buying from Canadian corporates is rumored from 1.0265 down to 1.0250. Expect small stops to be perched right below those levels.