We have all read the QE2 announcement from the Fed yesterday and have a basic understanding of their current plan. Markets this morning will digest the Bernanke article in the Washington Post in which he outlines the reason for this lastest QE2 move. In that article he highlights his hopeful outcome, specifically easier financial conditions that will promote growth. 1) lower mortgage rates for refinancing and affordable housing, 2) lower corporate bond rates to encourage investment, 3) higher stock prices to boost consumer wealth and help increase confidence which will in turn boost spending.
From an academic standpoint these intentions sound great. However, the reaction from the central banking and finance minister community overnight presents a different reaction to that which was intended. We have sent a list of all relevant comments from overnight to your inbox for your perusal, but specifically comments like “US easing will add pressure on asset markets” from the HKMA and “South Korea to actively consider capital controls”, and “US engaged in ‘uncontrolled money printing’” from the PBoC are examples of a world in which anxiety levels have increased as a result of the Fed’s actions yesterday. The hopeful intent of a US consumer that will feel like spending again or a corporate world that will feel like investing in the US again in the face of ever increasing and growing political and policy uncertainty combined with a housing market that is effectively in gridlock as a result of fraudulent loan practices, leave many scratching their heads as to utility of a QE2.
A rising stock market in the US may make people feel a little better off in the shorter term, but similar to Weimar Germany in which FX rates were never published and citizens were unable to ‘check’ how fast their currency was actually devaluing, a rising stock market in the US ignores the rapidly devaluing USD. One only has to look at the US stock market in AUD terms to realize that equities are rising only as fast as the USD is falling. The Fed’s move does little to help financial conditions in my opinion, but does indeed speed the rate of USD devaluation. It does more harm than good.
Price action overnight saw the expected results, Gold rallied, EUR/USD rallied, commodities generally rallied and pressure increased on EM currencies forcing central banks to intervene to stem the rise. Macro and real money accounts were all involved with profit taking the only flows going against the tide. USD/KRW based around 1105 as the BoK was seen aggressively on the bid, USD/PHP 42.40, USD/IDR 8895, USD/INR 44.21, USD/TWD 30.25 all the lows overnight while USD/CNY fixed 110 pips lower to 6.6708 from 6.6818.
USD/JPY grinded lower overnight amid several comments from finance officials and the like and we bottomed around 80.80 after 81.50 area the high and come back 81.00 now. EUR/JPY continues to rally as risk assets broadly are better bid and we topped out around the 115.40 area after trading through 112.00 only 3 days ago, we continue to like this trade.
AUD/USD poked through 1.0100 overnight and comes back 1.0095 now while NZD/USD touched 0.7940 amid comments from local officials concerned with NZD strength. EUR/USD rallied as high as 1.4263 area overnight and comes back 1.4230 now.
The Canadian government killed the BHP / Potash deal, shocking many in the market and USD/CAD trades 1.0030 now.
Disclosure: i do not hold any positions in products discussed