Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Forex Market Remain Cautious ahead of FOMC Report

Markets are digesting yesterday's election results, awaiting today's FOMC notes.  Election results, in the aggregate, did not differ from most of the polls.  Equity markets, which have appreciated as the USD's value has eroded, seem to be puzzled by the election, and like the currencies, they are nervous ahead of this afternoon's announcement from the Fed.

The economic news in the US was a little brighter today.  Year to Year Challenger Job Cuts were a -31.8%, better than the previous period's -44.1%.  The ADP Non-Farm Employment Change was 43k better than the expected 21k and -2k in the previous period.  Both the ISM Non-Manufacturing PMI and the m/m index of Factory Orders came in better than expected.  Markets are fully expecting some resumption in QE.  Good economic news might ironically reduce or delay the implementation of QEII.  Such action would be bearish equities and bullish the USD.

With today's Treasury announcement that they will need to borrow $362B during the current Oct-Dec quarter Bernanke had best keep the liquidity coming so the rates stay low.  Although down from the $569B in the 2008 year when financial bail outs were being made, this is the second largest Oct-Dec quarterly borrowing.  The federal deficit for fiscal 2009 totaled $1.3T, down from the previous year's $1.4T.

As we have previously mentioned the challenge for the analyst is trying to determine what Fed action has been discounted by the market.  After the 1000+ pip run in the EURUSD to the top side of 1.40, how much QEII is in the market?  In the CME futures markets yesterday, some people were increasing their positions.  Yesterday the open interest in the euro futures was up 10,190 contracts, and the OI in the options was up 7,022 contracts.

For the past week the Japanese yen has been having some nervous bouts of buying.  The yen's appreciation, especially against the USD has been perplexing, as their economic backdrop is bleak.  There is an excellent article in Seeking Alpha entitled Japanese Yen: A Red Dawn, by Axel Merk.  He begins:

"For many, the strength of the Japanese yen is a conundrum. How can the currency of a country with such a weak economy, such a high level of debt, weak leadership, poor demographics, combined with an ever deteriorating economic outlook be so strong?"

We have pondered many of the same issues, and wonder when the strength in the yen will stop.  The BOJ had moved forward their meetings to 11 4/5, in the shadow of the FOMC meetings.  They have vowed their own version of QE to combat deflation.  Perhaps an increased yen supply will make the yen less valuable.  The threat of more dollars by Bernanke worked for the USD.

In our article from 10 26 2010 entitled Will USD Weakness and Firm Yen Continue?, we suggested a cross trade, long the CAD/JPY in the 79 area.  We still think this trade has some merit.  Should the Fed's QE program be less aggressive than anticipated, this could help both the USD and the C$.  And if the BOJ lives up to their threats and takes actions to weaken the yen, this would also help the trade.  Stay long if involved from the 79 handle, and for others try to pick up a long in the 80 area.

Disclosure: no positions