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$200 Billion More Fed Infusions

$200 Billion More Fed Infusions

Currency markets held the close to the break-even area in recent trade, as commodity markets moved lower against the back-drop of higher U.S. equity trade that managed to test 1288 on the S&P 500 while global equity futures moved sideways. Low liquidity and increasing credit default swap costs created sporadic periods of trade that were aided by the news that the U.S. Treasury’s Supplementary Financing Program (SFP), designed eleven months ago to create a $200 billion debt ceiling buffer by way of extracting liquidity from the market, is about to be unwound.

The consequence of the Treasury breaching the $200 billion ceiling means that the rolling 56-day Cash Management Bills will not likely be maintained past mid-February. That move would lead to 8 weeks of Thursday trade that would flood the equity market with liquidity as the $200 billion buffer joins the weekly POMO auctions that will undoubtedly create more volatility and ultimately help levitate equity markets higher.

Having seen the ravaging effects of commodity inflation that is generated by the Reserve Bank of New York rather than by global growth and demand, the POMO-SFP road-show is likely to further stretch the boundaries of the potential for quantitative easing to continue floating asset prices higher, but now has a major common-sense question to answer; what happens when the Fed’s bloated balance sheet has to be balanced without the ability to print? (Rhetorical, because that day seems a long way off right now).

It is little wonder that the last three months of trade have seemed a little surreal as the QE2 program was launched and proved once again that whether wrapped in a bow that says ‘Credit Crisis Bailout’, ‘TARP’, ‘Quantitative Easing One’, or ’Quantitative Easing Two’, the implementation of each bailout has lead to a detachment from reality that subsequently reverted to the norm.

The moment that the Fed’s daily market manipulation, affectionately known as open market operations, is complete the same reversal off equity highs that was seen on the last adrenaline-fed moves in 2008, 2009, and early 2010 will happen. Until then, bank early and often, and trail the stops just in case the printing press overheats one day.

It is questionable as to how low the global central banking community will allow the Fed to sink the Usd, as the dollar index sits at levels around 78.00 that created strong long-sided reversals over the last four months. Intervention could lead to another period of trade that allows all asset classes to move higher, including the buck, as the Fed fights off those calling for the currency manipulation to be addressed. The strong-dollar policy that is touted by the U.S. Administration may be tested sooner rather than later, if history is to be repeated, which over a long enough time-frame does tend to happen.