Today stocks were mostly unchanged on a positive tone, while the EURUSD and gold similarly held their ground, albeit coming down slightly after the last weeks rally. Everybody is of course eying the Federal Reserve, but the weekend, and today were not free of interesting events.

The Chinese in particular have been complaining about the economic policies of the U.S., and its inflationary impact on developing nations, and asset prices around the world in today's prelude to the Fed's decision. Some officials have been talking about the investment impact of outflows from China on the development of other nations, claiming that the outflows are beneficial for both China and the whole world, while trying to isolate the matter from the Yuan appreciation problem. We believe that the preferred course of the Chinese is to keep the Yuan undervalued while internationalizing it slowly, and these periodic statements confirms this viewpoint.

In other comments, one lower-level speaker said that Chinese exporters can tolerate an appreciation rate of about 6% per year. In any case, we doubt that the U.S. Will be pleased with a 6% percent appreciation rate, and will keep the pressure on, until at least a double-digit annual rate is achieved. The comparison with Japan in the 80s keeps the Chinese on the edge, however, and if they do yield, they will only do when they are out of all ther options, and kicking and screaming, so to speak, as they oblige to the demands of the international community.

The Yuan was fixed today at 6.6906 vs. 6.6886 on Friday, but the outlook will be clearer at the end of this week, once we put the Fed event, and the NFP release behind us. In the rest of Asia, earlier in the day there was some speculation that the BoJ was intervening in the markets, but this was later seen to be unjustified in the face of the limited movement in the USDJPY rate which still holds around the 80.50 rate as we write these.

Germany and France dominate the weekend EU meeting; defaults likelier

Anyone taking a bet in the Eurozone debt market should be aware that even if the rather conservative and cautious duo ruling the two most powerful nations of the region remain in power, further bailouts and finance packages for the bankrupt periphery becomes less and less likely by the day. Merkel wants the private sector to taste some of the bitter recipe that she has been servicing the citizenry for quite some time, and this has kept the mood in the EURUSD tempered even as Portugal finally managed to make a deal on its austerity budget.

Trichet made his reservations "thoroughly clear" in Brussels while discussing the debt relief program and the private sector's contribution to it currently under consideration. The Germans today acknowledged the fact that the ECB Governor is not especially delighted at the continued insistency of the core of the Eurozone in having private capital share some of the burden through restructurings of debt, but while they affirmed that they take the ECB seriously, we understand that the emphasis remains firmly on the idea that the public cannot shoulder the whole burden.

This is not surprising, and neither can we expect an easy solution to the issue. Central bankers are aware that the market moves on sentiment, and if the governments hint that at any point they will refuse to provide the kind of backstop, insurance policy that exists at the moment with respect to government debt, it will just be a matter of time as they pile on the weakest to force the hands of the authorities. In this respect, it makes sense to be ready to bail out everyone, just to avoid actually saving that many entities. But while this is fine logic for the financiers, the government has the public to worry about and the public is very upset at the exact notion that everybody is going to be rescued from its purse. In other words, if the government decides to rescue more or less indiscriminately, it will lose the finance world, and if it decides to save the failing nations of the periphery, it will lose the electorate. Obviously, this is not a nice problem.

The interbank market was quiet today, with the 3-month Euribor rising by just 1 bp over Friday.

We conclude by noting that IMM commitment of traders data for last week is showing some decrease in speculative short positions in the USD. That must be due to the anticipation that the Fed's QE will be weaker than expected, which means that we might as well see a strong bearish move if the Fed surprises in the other direction. In any case, while the abundance of USD over the next few years is still an uncertain assumption, that the source at the Federal Reserve will not be restricting supply is a foregone conclusion, and traders should adjust their positions in accordance.