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  • EUR/USD Defies Gravity Ahead Of FOMC; QE3 Done Deal Or Coinflip? (Barcelona) - EUR/USD continues to seek higher targets ahead of the highly anticipated FOMC meeting, with the market leaving behind a carrousel's of days fully pricing-in a pro-QE3 announcement later today.

    As Kathy Lee, Founder at BK AssetManagement, notes: "The recent price action of the U.S. dollar tells us that investors are prepared for QE3 from the Federal Reserve. Knowing this, savvy traders will immediately wonder how much impact a third round of Quantitative Easing can really have if the market has already discounted the announcement"

    Amid such extreme unload of USD across the board, EUR/USD sentiment appears to be the most bullish YTD, with the spot rate having peaked at 1.2937 yesterday in last European trade, a number worth noting as it the 61.8% retracements of this year's peak-to-trough fall from 1.3490 to 1.2040.

    So what will the Fed do?

    The vast majority of commentators expect some form of easing or at a minimum, as Business Insider Joe Weisenthal puts it, "everyone expects some kind of language change (verbal easing)"

    An overwhelming majority, as reflected by recent USD selling, sees it obvious that the economy in the US is weak, and with Bernanke reminding how well past QEs have worked in his speech at Jackson Hole, not to forget the last straw being the big miss in last Friday's NFP reports, talking about a fresh wave of money printing announced today seems logical.

    On the other hand, there is a case that points towards 'disappointment' being a prospect not that distant. With Europe having kicked the can down the road yet again thru new stimulus policies by the ECB - subject to Spain bailout request - , and the economic data in the US modestly upbeat in general in early September, one may also make the case for another month of 'wait-and-see" by the Fed. Not to forget is election time in the US, and any new 'money printing' may be controversial.

    Inter-bank view

    According to Standard Chartered research analysts, they do not expect the Fed to ease today, despite recognizing that the risk of QE3 has risen; "We look for asymmetric trades that will perform well whether or not Fed enacts QE3."

    From NAB research team: ""There is "a fairly strong consensus view that the Fed will announce both an extension of the forward guidance regarding the commitment to keep rates low (until well into 2015) and announce a new bound buying program."

    UBS economists expect "a new six-month program of asset purchases will be unveiled, totaling at least $500 billion and primarily focused on Treasury securities" Mr. Berry notes

    Goldman is expecting something it calls a "double punch" which would mean that the Fed extends its low rates guidance and initiates QE3. Here's Goldman's Jan Hatzius: explaining it further: "A combination of large-scale asset purchases (QE) with a lengthening of the forward guidance for the funds rate from late 2014 to at least mid-2015.

    Extension of easing program key for USD reaction - Kathy Lien

    Kathy Lee notes: "If the Fed were to announce QE3, there's no doubt that the asset purchase program would extend into January, beyond the elections and the fiscal cliff. At that time, they will probably reassess and see if program needs to be expanded. The smaller the size and span of time that the commitment covers, the better it is for the dollar whereas open-ended QE, which is a low probability scenario would probably be very bearish for the greenback."

    "If the Fed passes on QE and only makes changes to their rate guidance, the dollar would most likely soar as investors reverse their QE3 bets. Aside from Quantitative Easing, we are also looking for the central bank to alter the rate guidance language in the FOMC statement and extend their low rates pledge from late 2014 to mid 2015" Kathy adds.

    Kathy shares her vision about possible scenarios:

    - Low Rates Pledge Extended to Mid 2015 > Dollar Bearish

    - Low Rates Pledge Extended Beyond Mid 2015 > Very Dollar Bearish

    - Open Ended QE3 > Very Dollar Bearish

    - Limited QE3 > Dollar Bearish but Magnitude to Depend on Size and Length of Program

    EUR/USD at risk of falling on 'buy the rumour sell the fact'?

    "Most QE3 has already been priced in" were the opening remarks from Valeria Bednarik, Chief Analyst at, at today's Asia open tech report. However, Valeria is prudent on supporting a meaningful USD recovery, saying "yields eased in Italy and Spain, without the ECB spending a cent, a sign that confidence starts to build up in the EU, ergo, such news will only put more pressure over the greenback."

    The EUR/USD "could continue to blow higher", says The Saxo Bank analyst John J Hardy, "well above 1.300 and possibly to the 1.33 to 1.34 range if we have a risk positive outcome," from tomorrow's Fed meeting. "With more sideways to eventually downside and a slower position reduction if market risk appetite quickly sours."

    Westpac believes that "USD atmospherics have soured quickly as the sluggish US job market has fueled expectations for yet more Fed asset purchases while EUR shorts are squeezed by a proactive ECB. Dollar Index could easily re-test the 2012 lows at 78.095 in coming weeks," Westpac team adds. "That would put EUR/USD near 1.31 with stretch targets of 1.33-1.34."

    Sean Lee, Founder at FXWW notes, the EUR/USD may go higher, but he warns, "I sense the easy money has already been made. We can expect some positional adjustment ahead of the FOMC."

    John Noonan, Head of IFR Markets, comments: "The market is aggressively pricing in Fed QE III - so the risks are skewed towards disappointment. If the Fed holds off - the EUR/USD could slide towards 1.2650. If the Fed does deliver QE III - the "buy the rumour/sell the fact" effect could result in dip to 1.2750."

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 13 10:22 AM | Link | Comment!
  • Euro's Rally Takes A Breather In Largely Uneventful Activity (Córdoba) - Amid light economic news stream, the dollar is consolidating last week's losses in narrow ranges on Monday, while stocks markets are narrowly mixed.

    The euro holds near a 4-month high of 1.2811 scored at the weekly opening as sentiment towards the shared currency improved after last week the ECB announced a plan to cut borrowing costs for indebted euro zone members.

    Dollar vulnerable ahead of FOMC

    Meanwhile, the US dollar remains vulnerable ahead of the FOMC policy meeting that ends on Thursday, as speculation the Fed could announce another round of quantitative easing (QE3) increased following a disappointing job report last Friday.

    "In the wake of Friday's soft payrolls report, our US economists now think the Fed will announce another round of asset purchases this week, of at least $500bn, and will also extend the commitment to keep the Fed funds rate exceptionally low into 2015", says the UBS analyst team. "We consequently expect the dollar to trade heavy as Thursday's FOMC meeting approaches, though with the constitutional court ruling and the Dutch elections out beforehand, the euro itself may also find upside drivers somewhat lacking".

    Meanwhile, according to BBH analysts, "Given the heightened risk of a balance sheet response to the recent economic weakness by the Federal Reserve, barring the German Constitutional Court knocking down the ESM, which we think highly unlikely, especially given parliament's approval and the speculation that Spain may formally request aid at the Eurogroup meeting late in the week, the dollar may remain under pressure", although some cautiousness by short-term momentum participants is in order.

    Weak China's data weighs on stocks

    Over the weekend, China reported that industrial output fell to its slowest pace in 3 years in August, while CPI ticked up for the first time in five months. Meanwhile according to BBH, news of a wider trade surplus ($26.6 bln from $25.1 bln) was a function of a small increase in exports (0.6% on the month) and an unexpected fall in imports (-0.3%).

    Worries over a slowing global economy in the wake of disappointing Chinese data weighed on global equities. Wall Street indexes edged lower at the opening, pulling back from multi-year highs. The Dow Jones fell 0.2%. The S&P lost 0.1% while the Nasdaq declined 0.3%.

    In Europe markets moved modestly lower, with the Euro Stoxx 600 down 0.3%. However, Asian markets were mixed to slightly higher after disappointing data from China boosted hopes for more stimulus measures.

    Gold fell 0.4% to $1,732.60 an ounce, while crude-oil futures declined 0.6% to $95.85 a barrel.

    Risk events this week

    "A more cautious mood and relatively tight trading ranges are probably explained by significant event risk this week", says the Wells Fargo team. On Wednesday, the German Constitutional Court rules on the European Stability Mechanism, while Dutch national elections are also taking place the same day. On Thursday, the Federal Reserve is due to make its policy announcement, accompanied by the latest macroeconomic projections. "While we expect a positive outcome from the European events, a negative ruling by the German court is a low probability but potentially high impact event", Wells Fargo comments.

    Meanwhile, expectations for Fed easing this week are already elevated and there could be scope for some disappointment if the Fed underdeliver, according to Wells analysts.

    "On balance however, we believe last week's upturn in risk sentiment should remain broadly intact going forward. Although global economic data is yet to show meaningful signs of improvement, monetary authorities around the world have been stepping in more decisively to support growth and financial market sentiment, which should play out in favor of most foreign currencies in the months ahead", they conclude.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: forex
    Sep 10 11:47 AM | Link | Comment!
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