[cppene]

September is notable is not only for its historic equity market volatility. This year it also memorable as it will feature the one-year anniversary of some of the most stunning financial market upheaval in memory that sparked a mad scramble for USD as funding markets froze. At present, it is clear that efforts to rebuild the global financial architecture are bearing fruit. Libor rates are near record lows, and the TED spread is not only back to pre-Lehman levels, it has actually dropped below 20bps, levels last seen in early 2007, or before subprime became front-page news.

USD entered September after trading flat through August with DXY locked in a very narrow range from a low of 77.42 to a high of 79.5. That stability belies that pressure is building for a USD breakout, one way or the other, soon. This September might end up being memorable itself. Technically, the recent pattern leans toward bearish risks dominating, but there are also strong reasons to
conclude that the balance of risks is tilted to the upside at least over the next one to three months.

One source of potential USD uncertainty was removed when President Obama reappointed Fed Chairman Bernanke in late August. However, that announcement all but coincided with news of the staggering fiscal headache the US faces in coming years, which kept USD near its recent lows, drifting just above 78. Congress and the White House both project that the US fiscal deficit over the next
decade will top US$9tn, feeding concern about USD, which remains exposed to foreign investor sentiment keeping alive concern about the USD’s reserve currency status. Meantime, alongside the uncertain risk backdrop, improved but still wobbly prospects for global economic recovery, and signs that the US economy is emerging from the depths of recession and poised for growth in H2,
are factors that suggest the next major move in USD might well be to the topside. As stock markets tend to struggle in September, the risk backdrop might well be the trigger for an upward USD move in the very short-term.

Despite the potential for a short-term rise in USD, the longer-term concerns are expected to return to the fore in the next 6-12 months, re-establishing a sustained, orderly decline in USD.