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Ahead of the FOMC
The Fed meeting tomorrow will most likely result in an announcement of MBS proceeds reinvestment into Tsys, in our opinion. This expectation is shared by a number of market commentators, including Goldman Sachs's Jan Hatzius. The Fed may not have the will or political ability to expand its balance sheet further (especially after conducting discount rate hikes and test liquidity withdrawals amid pervasive tightening/policy normalization talk just 2-3 months ago), but it does to prevent its balance sheet from shrinking. This is also a first step toward all-out asset purchasing/QE in the latter end of the year if the economic picture continues to deteriorate.
The Dollar Index bounced off its 61.8% fibo retracement, which also coincided with early 2010 support levels, and reclaimed its 200d on a closing basis. It has been declining primarily because of 1. decoupling and 2. dovish Fed expectations. The decoupling thesis is a bit of a circular argument, as a rising USD environment causes foreign bank credit access to seize up and leads to a positive-feedback USD mismatch. Additionally, the US consumer remains the backbone to the global economy, and if the US economy continues declining, expect China's, Japan's, Eurozone's, etc to follow suit. Again, their banks (as are ours) are dependent on a falling USD. As for FOMC expectations, the reinvestment of MBS proceeds has been largely priced in, if 10yr yields/USDJPY are any indication. Continued deterioration of the USD by the FOMC's statements will require more-than-expected dovishness. If the 61.8% fibo level can hold after the Fed statement tomorrow afternoon, we expect the Dollar Index to begin another strong surge up.
The EURUSD (the biggest cross component of the Dollar Index) sold off from its significant 1.33 resistance level (March & April lows) today, selling back to the 38.2% fibo level around 1.31. If this level doesn't hold, look out below for the euro. However, we expect a bounce from this level to 1.35, which coincides with the 50% fibo retracement as well as the 200d. From there, we expect a plunging EURUSD and a resumption of the Eurozone sovereign debt crisis.
EURAUD is an important cross to watch as it coils in its symmetrical triangle. Its corr to equity vol (as well as to inverse equity as shown via the SDS ETF proxy below) is significant to all assets. If this thing breaks out, watch out below in risk assets.
Speaking of AUDUSD, it is breaking down from its rising wedge. A retest of the 200d may be in order for the Aussie cross, and if the SSEC resumes its downtrend, the AUDUSD could be putting in a top. Too early to tell but bearish looking in the near term.
Cable found selling at its 61.8% fibo level, as expected in the previous post. Could be beginning to put in a top. If 1.58 breaks on a closing basis, a trip down to the 200d could be next. In the short term, 1.58 should act as support and GBPUSD might find some buying around there. Again, we think GBPUSD is topping while EURUSD has some room to run before topping and expect EUR to outperform GBP.
So is it going to be short USD/long risk or long USD/short risk? We are clearly at pivotal points (in between 200d & 61.8 fibo level on DX and in between 200d and summer highs on SPX), but the following chart of the VIX below suggests vol is about to expand, which suggests the 61.8 level on the USD index will hold and that the majors and equity indices are primed for reversal. This also suggests EUR & GBP vs CAD & AUD are going to outperform. The Bollinger Band VIX trade has been one of the most reliable setups of the last couple years.
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The FED will announce nothing tonight.
The markets will go down tonight.
That's it. simple as that.
How much of an effect can an immediate QE announcement have on the stock markets
Actually I don't think they will use that.
I'm thinking of a stronger weapon. Qe2 is just media hype.
What will happen if FED tells that extended perioud means 2010-2011-2012
Then. Markets will soar.
So explicit language on Extended period is their weapon.
just my2c.
They HAVE no weapons.
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+10% in the next week if yes and if they don't -2% today.
I also don't think they'll announce a QE2. When a QE2 will happen, Obama will present it on TV, not the FED.
The meeting also only took 1 day, you don't decide in one day about what to do with 200 billion, let alone 1 trillion like GS said.
For now, we should only eat the shrimps from the GOM and hope they actually came from somewhere else then the GOM, we'll deal with QE2 in the next episode.
They'll use Obama as their front man puppet, as the Fed will not be seen as the ones behind this devaluation of the currency (at least not directly in this case). It'll come off sounding like, on CNBCBSABC as BHO and the Dems look like they are trying to help the hardworking little sheeple by dropping money from helicopters via QE2.
Count of it.
The fact is, the Fed ILLEGALLY purchased Fred/Fann devaluating paper and now need to be rescued from the over $1,200 billion of paper junk they are holding. Since the Fed CAN NOT allow loss on this, as remember they bought this junk illegally, the Fed is basically bailing out themselves via front man BHO doing QE2. So they'll say they are helping those with Fred/Fann loans, yada yada yada, etc to help the little sheeple out.
Legality?
There are no rules for the unaccountable and untouchable.
Laws are for suckers (just ask Arizona).
Don't decide in 1 day? What's to decide? THEY DO WHAT THEY ARE TOLD!!!!
FED board as divided as Congress...as divided as American people....can't decide....won't decide. I think not much happens FOMC. We continue the slow slide. No boldness with these guys.
Thanks for this, Naufal. For a 50 year old you would be excellent. For a 20 year old, both excellent and tremendously promising. I recommend a career as a central banker or finance minister for a King. ;-)
For christ's sake let's hope there are no central banks when he's fifty!
In a panic most of us freeze up..do nothing and hope it all turns out.
The fed is panicked and will do nothing..
they are afraid of expanding the money supply
they are afraid of tightening
they are afraid of deflation and inflation
Ben is constipated as he sees his history as one of failure and derision
paralysis of gov and major institutions await
One could see that no one profits from this but many will suffer..
The way out of this is simple and seen by many..
but it is alien thought,forbidden to the elites so they will never do what needs to be done..they cannot for it burns their world view to ashes and mocks their whole existence..
what do you mean by Elite Aliens?
Obuma was not addressed by the above -
Alien "thought" is that the fed is NOT the best way to manage the money supply ..and is the problem. Alien "thought" is that the Fed IS a criminal enterprise of world wide influence ..
GS is call the squid, but it is the FED as organized which fits that picture.
'Ben is constipated as he sees his history as one of failure and derision'.
Hmm, bit like Greenspan's!
DavidC
My friend has seen Bens speach?? wow
i another perosn will present it. Ben basicly will say the world is fucked and he has run away.
Missionary or doggy style?
Korn holed!
Yuck! OMG! I cannot believe that you wrote that. I almost fell out of my chair laughing. It brought tears to my eyes.
That is the best news I have heard in two years. Ben has seen the light at the end of the tunnel and it is an oncoming train. Much better scenario than the "Thelma and Louise" ending I had predicted!!!
the fed won't say anything to roil the markets
ergo if they say nothing the market will rally, and then fall the next day
if one of them says something, or the vote is split, the market will tank but Bernanke will come in with his PPT in a few days and put a bid under things
what they will probably say (if he can somehow bitch slap them all into submission) if they want to do some QEII is that additional expansion of the Feds balance sheet may be warranted and a policy of INCREMENTALISM will be used to accomplish this. Something old something new
if the Fed tanks the market going into the election the political class will take a huge hit to their credibility and a few of those hillbilly types will get elected, and then all hell breaks loose in Washington
SP500 important chart update :
http://stockmarket618.wordpress.com
FEDERAL RESERVE SUCKED
http://williambanzai7.blogspot.com/2010/08/federal-reserve-sucked.html