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Faros Morning Update - Tensions Increase in QE2 Speculation

|Includes: Randgold Resources Limited (GOLD), USD

 Tensions Increase in QE2 Speculation

Interesting bank poll we saw shows that, 15% of respondents say the Fed QE2 announcement will be in line with expectations, 12% say they will surprise with more, 41% say they will surprise with less, and 32% say they will leave it open-ended.  The question is, what are those expectations?  The Fed is trying to find that out itself as evidenced by a Bloomberg story indicating that the Fed polled dealers to estimate the likely size and impact to yield of a new Fed bond purchase program.  Over the past few days we have heard GS discuss $4trn as necessary according to the Taylor rule, we have also heard numbers like $100bn per month and $200bn per month on an open ended basis.  The open ended solution, ie. Committing to a certain amount per month, with no definite end point, gives the Fed the flexibility they need and avoids the trap of announcing one specific total ‘shock and awe’ amount, only to see that amount be insufficient. 


In any event, the speculation and discussion is elevating uncertainty in the markets and we witness the BoJ moving their next decision to the two day’s after the FOMC announcement, the first time they have moved their meeting in recent memory, although Shirakawa was cautioned that it was unrelated to the FOMC.  USD/JPY resumed its grind lower with 81.30 trading now after 81.80 earlier in Asia and we heard some noise from Noda denying any plan of coordinated intervention coming out of G20.  Noda was also mentioned the strong JPY was bad for the economy IF it persists.


KRW outperformed as the economic growth forecast was revised up to 6% and this helped USD/KRW regain some lost ground with 1122 area the low after 1130 the high and there was talk of smoothing into the close.  USD/MYR was basically unch with USD/TWD rallying into the close up to 30.69 after 30.65 the low.   We heard macro was a seller of USD/CNY across the curve from 1m to 1y.  1y traded down to 6.4750 after 6.5200 previously.  USD/CNY fixed 74 pips higher at 6.6986, which made sense after the EUR/USD traded through 1.3750.  The USD traded lower after its decent rally the previous day but the usual ranges have held for now.  AUD/USD and NZD/USD rallied with AUD/NZD itself testing support at 1.3000. 


EUR/USD retraced some of its losses from the previous day and we note a random headline in the WSJ in which a Vice Fin Min from China on a recent visit to France again reiterated China’s involvement in European sovereign debt as part of their continued reserve diversification measures.  We are also hearing chatter amongst the banks that the ECB is buying large amounts of Irish bonds through US and European banks, the largest purchases since May / June.  The range in EUR/USD has held so far between 1.3700 and 1.4100 and Elliott pattern followers will note that this 4th wave consolidation is occurring as it should and the 5th wave move higher could be a powerful one.  We continue to look for 1.5000 by end Q4.  Rate differentials and the basis continue to support this view. 


USD/CHF held the 50 day at 0.9924, a moving average its been unable to breach since it broke through to the downside back in June.  EUR/CHF remains stuck between the 200 day at 1.3897 and the 100 day at 1.3398. 


European EM currencies were better bid with USD/PLN and USD/HUF both lower and the PLN/HUF cross is testing the 200 day at 69.045 which has held as support for the better part of 12 months now.  USD/HUF has held resistance at the 200.00 level  and a break of 192/193 opens a move 180.00. 


USD/ZAR held the 50 day on its move higher yesterday and we are trading 7.0360 with resistance above at 7.0743.  News that the South African mid-term budget confirmed that the government will seek to further dismantle capital controls, helped the rally. 




Good Luck

Disclosure: I do not take positions in any assets I speak about