Today the Euro rose against the dollar, which lost some value against the yen after rallying strongly last week. Gold and oil were both up, while bourses all over the world registered gains in response to a renewed bout of optimism that the double-dip scenario will not materialize. Shanghai was down however, perhaps on concern about the string of higher fixes in USDCNY, and their impact on exports, and possibly in response to expectations of a rate rise in China after strong inflation numbers. We don't think that a rate rise is on the cards though, since the PBOC cannot be too happy with its indirect tightening through the FX rate as it gives in to U.S. pressure

In spite of all the optimism, European sovereign spreads continue to widen. Both Irish Portuguese yields jumped considerably today, clearly in reactioon to the oncoming Euro 1.5 billion 4- and 8-year Irish debt auctions. If these do not go well, a swift return to risk aversion would not be surprising.

China continues to revalue the Yuan

China continued to revalue its currency aggressively today, fixing the central parity rate at 6.7110 vs 6.7172 on Friday. Japan was on holiday, so there was no government intervention into the yen market. Traders, in any case, seem unwilling to drive the trend higher or lowe in the absence of new developments. Of course, if QE comes out of the Tuesday meeting, the BoJ will find itself fighting against a hurricane, as traders become even more bearish on USDJPY

Meanwhile, U.S. Trade Representative Ron Kirk cautioned about the various sanction proposals against China, noting that such ideas may not be compatible with WTO rules. He made a point of showing his and the administration's sharing of the Congress' concerns, but did not go so far as to openly endorse the suggested measures.

We hear comments from traders that they are confused and unsure about what to do with the USDCNY. If this is a general sentiment, the Chinese can congratulate themselves, since they always did their best to curb the appetite of speculators by being less than predictable with their actions. Our own point is that the USDCNY trade is for the long term. As such weekly, daily events will surprise but the trend, and the bias of the pair remains strongly tilted to the upside. For now, some readjustment of the Yuan parity rate seems like a cheap price to pay in order to avoid a flare-up of protectionism.

No sign of improvement in homebuilder sentiment

NAHB's home builder sentiment index reached it lowest value in January 2009, at 9. Afterwards, tax credits and incentives led to a brief spike in activity, and builder sentiment improved in accordance, with the index rising above 50 in April 2009. But now it seems that the euphoria is gone, and a grim sense of reality pervades.

The September housing market index was at 13 in September, unchanged from August, versus expectations of a rise to 14. Since a reading above 50 indicates optimism, the verdict of the building industry remains overhwhelmingly negative, even as mortgage rates remain at historic lows. U.S. homebuyers are worried about jobs, credit, and the future, which reduces the enthusiasm for borrowing and risky investments. Apart from the deterioration in builder sentiment, buyer traffic index fell to 9 from 10, and sales expectations over the next half-year were unchanged.

This is clearly a bad report, and there doesn't appear to be any cause for cheers. Builders are convinced that the market will remain distressed for the foreseeable future.

Risk is riding the bullish sentiment today, as stocks, as well risky currencies like the AUD rally against the dollar. While the tone of trading would suggest that the market is seeing it as a done deal, we still prefer to wait and see the actual decisions and comments on Tuesday before deciding on the sustainability of the positive momentum. Today is not very heavy on data, but it is still seeing hectic action, which makes us think that the rest of the week may also see a higher volume of activity. Let's first wait and see what Chairman Bernanke has to say tomorrow.