Nomura FX: "Mr. Bernanke: You Are Trapped!"
From Nomura's Brent Donnelly
Mr. Bernanke: You are trapped!
The way the data and psychology has turned down just as QE2 is ending is no coincidence – just like it was no coincidence when the same thing happened at the end of QE1. To use the Fed Chairman's preferred term these days – the impact of QE is transitory. Much like fiscal stimulus, QE has a temporary impact but as soon as the extraordinary intervention ends, the patient begins to wither again. This is the trap that Bernanke fully understands and it seems like the endless monetization prophecies of Zerohedge and The Daily Dirtnap are at risk of coming true.
Without the promise of QE3 from Bernanke yesterday, markets are sad. With no major data on the docket and nothing promised from the Fed (Evans also seemed to shy away from hitting the panic button yesterday), we may be in for some creative destruction for a while.
I have not been able to stick with a coherent equity view over the past few days as there are two offsetting factors at play in my mind : 1) the bear case is playing out perfectly as QE ON or QE OFF continues to be the only variable determining asset prices and multiple bearish cyclical factors kick in (sell in May, end of presidential cycle, etc)… But 2) stocks appear very oversold as we are in the 6th straight down week for the S+P and the market seems fully cognizant of the deceleration in US growth at this point.
I guess things can stay oversold for longer than one might expect especially after we have just rallied 100 percent in less than two years. It is probably reckless to buy equities until we get some sort of huge blowoff day. The slow motion car crash we are witnessing since May 2nd is remarkably orderly. Too orderly.
AM/FX usually contains a trade recommendation but right now I am flat. Bearish fundamentals + very oversold market = be patient.
Watch for significant barrier madness in USD/JPY at 79.50. Finally, for those keeping score at home: EUR/USD was trading on a 1.19 handle on this day last year.
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