FX markets are still digesting the Fed's announcement to initiate Operation Twist with risk appetite lower at the start of the day. USD stayed in demand as the bearishness of the Fed's analysis provided no respite from the current negative sentiment. In Asia, there are rumors of Asian central banks smoothing the topside with intervention estimated around $2.5bn according to a UK budge bank. The Fed's operation Twist was basically in line with market expectations and will involved the buying of $400bn longer term treasuries (6-30 yrs) while simultaneously selling the equal amount of short term treasury securities of 3 years or less.

In addition, the commute would maintain its current program of reinvesting principle from maturing security instruments. However, the FOMC's downbeat assessment of the economy disappointed the market. As with the August meeting, Fisher, Kocherlakota, and Plosser dissented against the action. This division should not be a surprise to anyone who had heard their view on further monetary accommodations. As for the potential effectiveness, we are suspect that this will provide any material kick. In simplistic terms, we doubt that lending in the US has been stymied so far by rates being unaffordable but rather by fear of an economic downturn. Given this environment, we think it's unlikely that the Fed's twisting will have any real impact other than further manipulating and distorting asset prices.

Perhaps the more successful yet radical strategy would have been to do nothing - merely expressing faith in the US economy would naturally right itself in due time. But policymakers like to do something and continue to risk their already fragile credibility. The USD broadly rallied on the release with the GBP, AUD & NZD hit hard. AUDUSD dropped sharply on the more bearish announcement, trading to 0.9983 from 1.0250 while NZDUSD followed suit dropping to 0.7940.

Following yesterday's dovish minutes, the sterling was sold heavily as the cable fell to 1.5448 and GBPJPY dropped to an all time low at 118.30. There was a noticeable lack of new negative European developments but clearly a risk off environment has entrenched itself. Risk reduction continues to be the primary driver in the markets.

Asian regional indices were off with Nikkei -2.0%, Kospi -3.2% and Shanghai -1.7%. The data flow from Asia failed to provide any reassurances that the global economic slowdown would skip Asia. China HSBC's flash manufacturing PMI dropped to 49.4 vs. markets expectation of 52.9 and prior read at 49.9. With the reading under the 50 threshold, the flash release suggests manufacturing activity continues to suffer due to weaker demand and tightening credit.

From New Zealand, Q2 GDP growth fell to 0.1% qoq, significantly below expectations of 0.5% qoq and the RBNZ's official forecast of 0.6% qoq.

This morning's German PMI helped retain the negative sentiment as September manufacturing PMI 50.0, vs. 50.5 exp, 50.9 prior while services printed at 50.3 vs 50.5 exp, 51.1 prior. Data released today showed that Eurozone PMI is now all below the theoretical 50 threshold. The headline index from 50.7 to 49.2 suggests a significant drop in quarterly GDP. Clearly, fears over the debt crisis and local austerity measures are taking their toll on domestic activity.

It seems that the current expectation for Europe remains too optimistic and further revision in growth should be expected. For Greece and the rest of Europe, this means further challenges and difficult choices. In the end, without growth, the possibility of Greece not defaulting and remaining in the EMU remains slim in our assessment. Greece conceded that they would accelerate general austerity measures in order to appease the Trioka. Greek Finance Ministers Venizelos was quick to add that without further funding, the real economy and banking sector would quickly breakdown. We suspect that EUR will remain a sell on rallies.

For the rest of the day, markets will be watching for headlines from the world leaders gathered in New York for a UN general assembly - although the IMF meeting tomorrow should be far more important to the markets. On a final note, price action in the EURCHF has lead to plenty of speculation that the SNB has adjusted there floor to 1.2500. At this point, we don't believe that anything official is afoot merely heavy USD buying and the removal of speculative safe-haven flows into CHF.
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