I am still working on a revision for the commodity crash playbook to take into account the new QE3 regime, but the trading action is already moving faster than I can reformulate.
(click images to enlarge)
The Australian dollar's QE3 reversal has it retesting support/resistance from the April highs
The Australian dollar's reversal leaves intact the downtrend starting from 2011's historic highs
The U.S. dollar retakes losses to the Canadian dollar from the immediate aftermath of QE3
Source of charts: FreeStockCharts.com
The Australian dollar is particularly interesting at this juncture because a break in its current downtrend would be a very bullish move. Such a move would remove my marginally bearish bias against the Australian dollar.
In the meantime, these reversals are potentially important signals that many commodities and related stocks will also soon reverse whatever gains were achieved in the immediate aftermath of the official announcement of QE3 last Thursday, September 13. If so, these days will generate convenient milestones for gauging how high QE3 might take commodity-related stocks until the next peak. In other words, the coming days may provide some of the best buying opportunities in commodities for some time to come as the market scrambles to price in the presumed inflationary impact of monthly injections of quantitative easing. From what I can tell, even the folks who used the last Fed minutes and last month's Jackson Hole confab to project QE3 for September did not expect the Fed to write this kind of blank check (I left my guess without an implementation date and dropped the QE3 label).
Note well that the Australian and Canadian dollars also quickly reversed their gains after Ben Bernanke unofficially announced QE2 on August 27, 2010. (The close-up charts below use stockcharts.com, given limitations in FreeStockCharts.com with historical data. In both charts below, the U.S. dollar is in the denominator of the currency pair).
The Australian dollar in the immediate aftermath of QE2
The Canadian dollar in the immediate aftermath of QE2's announcement
Source for charts: Stockcharts.com
That reversal occurred over two days, just like the current post-QE3 reversal. However, starting in September, both currencies proceeded to rally again against the U.S. dollar and did not stop until the early part of 2011. The key question now is whether the promise of constant printing is enough to compensate for what must be diminishing returns to more and more quantitative easing.
For now, the simple trading signal going forward is to avoid getting bullish until these currencies regain their QE3 lift. The lows from the current reversal can serve as a convenient trigger for stopping out of these trades.
In the meantime, I have ended the long USD/CAD trade I called out last week due to my expectation that the U.S. dollar (UUP) would stabilize this week and even rally. The next milestone to watch this week is the Bank of Japan's statement on monetary policy. Given the yen's large losses, traders seem to be anticipating a long-awaited yen intervention. Such a move should drive the dollar higher, even if only temporarily.
Be careful out there!