The markets were dominated early in the day bt jockeying for position ahead month-end fixings. The dollar-negative flows were well-advertised and it looks as though the market took the flows into account (and then some…) getting too long of EUR/USD, AUD/USD and other pairs, prompting a big washout to the downside. Also contributing was the move by Chrysler to declare bankruptcy. Obama took the recalcitrant creditors to task, the latest ant-Wall Street rhetoric, helping undermine what had been a strong equity rally despite the Chrysler fears.

Now that month-end and the Chrysler uncertainty is behind the market, the hope is that equities can move through the important 872/875 level on the S&P on a closing basis. This should support the reflation trade we’ve written about so extensively in recent months. The move could have significant legs as it is being driven by continued signs of stability in the US and not just on hopes for a Chinese-stimulus-driven rebound.

Short-term traders have turned themselves inside-out several times this week. It got short EUR/USD on Swine flu on Monday and long on glimmers of economic hope Wednesday and Thursday, only to see prices fall pretty significantly. We may need to wait until Tuesday of next week when the market is (mostly) back to full strength after holidays for a firm trend to re-establish itself.

One important anecdote today: The BIS was spotted buying EUR/USD at least three times today (alas at ever-lower levels) at 1.3300.,1.3250 and 1.3200.

Keep positions small and stops wide amid thin markets, if you must have a position over the next few days.