If central banks reduce interest rates, most asset types appreciate. Nowadays since it is no longer possible to reduce interest rates any further, authorities are intervening in the market directly through various means in order to effect an increase in the quantitity of money, so that economic actors have fewer hindrances when they desire to spend, invest, or speculate. As the Federal Reserve insinuated unmistakably last week that a further bout of monetary easing is being considered, financial actors were relieved that their multiple bubbles will not be bursting soon, which explains why there are so many Euro, and AUD bulls in action at the moment.

But let's keep this in context - some $850 billion in stimulus, sponsored by Larry Summers, among others, and enacted by President Obama last year with much fanfare, has barely managed to make a dent in unemployment, or lift sentiment significantly. How likely is it that the new measures to be announced by the Fed will be larger or more effective than the many packages that came before them? And what is more, although the first large stimulus package was greeted with enthusiasm and excitement by the market, the hundreds of billions of dollars or Euros, splashed around with increasing frequency since then make us expect that the market will register but a blip in response to the new measures of the Fed. As in the case of a drug addict, where ever greater amounts of the favored drug has a weaker impact with each application, the effectiveness of central banks' pumping operations fail to impress the market as much as it did in the past with each new application.

Trader sentiment on stocks was mixed today, while the general optimism on risk remained in place. In Asia stock prices were up, while European traders were less enthusiastic. In the U.S. stocks are little changed as this is being written. Gold is slightly lower, but maintains a bid tone.

Higher USDCNY fix causes a bit of a surprise

The PBOC fixed the central parity rate at 6.7098 today, almost 100 points above Friday's level, but the NDF's were still bullish on the Yuan. The central bank sustained its commitment to moderate appreciation, with remarks by Xu Nuojin, the head of the Guangzhou branch of the PBOC, repeating the message that there will be no changes to the exchange mechanism, and that U.S. trade deficit will not be eliminated by Yuan appreciation. This viewpoint is confirmed by Nobel prize winner Robert Mundell today, who, according to Bloomberg, insists that aggressive appreciation of the Yuan will lead to turmoil in the region, while being neutral on the U.S. trade deficit. We regard strong Yuan appreciation as one of two triggers of the next stage of the downturn, the other being the Eurozone sovereign debt crisis. Although China's approach is faulty from a long-term point of view, it really doesn't make sense that the U.S. forces the Chinese to appreciate their currency just as it does its best to manipulate markets through massive "quantitative easing". After all, the Chinese keep expressing their discomfort at the Federal Reserve's actions at every arising opportunity. The PBOC will be on holiday next week.

Some traders focus on ECB rollovers next week

The Eurozone banking sector will see some activity next week as the rollover of various ECB refinancing operations approach, and the Irish clarify how they intend to manage the dismantling of their Anglo-Irish Bank. Apart from the regular weekly auction, some E 220 billion worth of refinancing operations with varying terms will reach maturity on Thursday, with the possibility of the withdrawal of so much liquidity from the interbank market creating fluctuations in the EONIA and Euribor rates attracting some attention at the moment. The Irish announcement comes on the same day. As tensions in the periphery of the Eurozone remain high, it will be interesting to see what kind of impact the termination of the existing LTROs will have on currencies, and markets. For today, German Bunds continue their flattening trend, and worries about Ireland and Portugal continue to widen spreads of their bonds and CDS. The ECB chief's comments did not help, as he repeated his standard statements about inflation, fiscal stability and growth.

Markets for now seem to be in a state of central bank-induced euphoria, so the problematic aspects of the global growth scenario remain neglected. But the problems are real, the imbalances are massive, and and since there is no concrete plan to address the dangers implied by them, it is only a matter of time before we find ourselves in a different, yet severer financial crisis that will probably culminate in the dismantling of the existing system.

Meanwhile, as the USD-bears are aggressive, we are convinced that the dollar remains in a long-term uptrend against the Euro, and will gradually appreciate against most emerging market currencies and high-yielders, as well (although probably from a lower level). We are aware that the U.S. economy remains in a vegetative state, but it is inconceivable that weakness in North America can be isolated from the rest of the world through outflows and liquidity, as it is being proposed.

The debates about decoupling are not new. In the current version, which is as unconvincing as the previous editions, we observe that analysts focus on the effect of speculative money, and assume that it will generate perpetual motion. We will not repeat the arguments elucidated here many times before, but will let the reminder suffice that most economies in the world are in a race to the bottom as far as fiscal responsibility and discipline are concerned, and that the easing undertaken by the Federal Reserve is by no means an exception. It is not a coincidence that interventions, protectionism, and fiscal discipline are the theme of the moment; only through such extraordinary and costly measures have the markets been brought from the brink of a historical crash. Confidence is low, and once markets awake from the effects of euphoria, assets with strategic value, such as the dollar, will be among the benefiting ones. In fact, the mere argument that the enormous rises in some emerging market bourses are being financed through the dollar should be enough to refute the idea that the USD is doomed any time soon. It is not just places like Turkey or China - even the Gaza Strip and the Palestinian Territories are experiencing construction bubbles. We remain bullish on gold vs. Dollar, however, because gold is an insurance bet against the crisis scenario, and an absorbtion channel for excess money that has nowhere to go, and it will continue to thrive as long as interest rates remain near zero.

Apart from these, Japan's trade surplus for August was released to show a contraction of 35% y-on-y, vs. expectations of a 44% rise, confirming that the strong yen was having a deleterious impact on the nation's economic performance even then. On the whole, it looks like Japan has indeed gotten away with its brief intervention in currency markets, so while the long-term trend is likely to remain upward, for a while we may observe some fluctuation around the current levels, with the upward bias predominating. We have nothing to add to Ben Bernanke's comments on Friday where he admitted that the current policy has not contributed perceptibly to the reduction of unemployment, which also happens to be the market consensus.