Mr. Mantega is right: The dollar will be depressed

-Remember Mantega the Brazilain Finance Minster that ”re-invented” the term currency-war two years ago? He is now on the wires again saying that QE3 it will depress the dollar. We can only agree with Mr. Mantega and repeat our call for going into USD funded carry-strategies. See FX Strategy: Time to go long carry.

-However, the market is still judging the impact from the Fed announcement last week. We have seen the market having second thoughts about the effect this week with cyclical currencies, commodities and equities under significant pressure. The steepening of the curve in the long end that we witnessed last week has to a certain degree also reversed. However, in our view, the Fed’s move last week was a real game-changer. See for instance Cross Asset Strategy: the simple way to trade the Bernanke-Evans rule. The best example of the significant turnaround we have seen in the FOMC is probably Minneapolis Fed President Kocherlakota. See his speech from yesterday here. In May, he argued that the Fed should start taking away policy accommodation in 2013. Yesterday, he said that the Fed, “...should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5%”. Kocherlakota now supports the so-called Evans rule Hence, the former hawk is now taking an even more aggressive policy stance than some of the arch doves in the Fed.

-There are few key events to focus on for the FX market today. However, the FT story that Spain and the EU are in talks to trigger ECB bond buying, means that yet another event and tail-risk should be removed from the euro.

-Furthermore, we think that the very dovish comments from Minneapolis Fed president Kocherlakota could help to turn around the current weak risk sentiment that has prevailed this week and in particular the dollar should start suffering again. In other words, we look for upside for EUR/USD today. If the talks between Spain and the EU develop, it might weigh on the Swiss franc, but also the Scandies (safe haven light) might suffer as we saw after the ECB meeting two weeks ago.