Dollar Lays Anchor As QE3 Speculation Takes Over

Source: The Street

The fundamental fires are raging; but the dollar and broader markets will struggle for direction going forward as the possibility of QE3 adoption by the close of the week petrifies the speculative masses. We could already see the influence that this uncertain but very important event has over the markets through the opening session of the new trading week. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the potentially dominant fundamental event would lead the benchmark to its smallest range since July 25 th . This adds another layer of frustration for greenback traders (bullish and bearish) who have seen the currency trade one period of congestion for another. For risk appetite trends, the same fear-derived inaction was present in speculative positioning. The S&P 500 Index put in for a highly suspect rally through the morning hours of the New York session that was completely reversed through the close and was accompanied by notably-restrained levels of volume in the meantime. These are the trading conditions we should expect going forward: troubled trends, tempered volume and high volatility.
Why is the market anchored when there is such heavy speculation surrounding a market-defining event? It would stand to reason that the building expectations for a third quantitative easing program (QE3) would push the market into a strong trend. However, there is a difference between forecasts and positioning. While the call for another round of stimulus from the Federal Reserve may be growing; the masses are distinctly aware of what happens should the central bank leave market participants empty handed. Once again, we are witnessing the balance between probabilities and the influence different scenarios can have over the markets. In this case, while a large contingent of the market believes that the policy authority has little option aside from expanding its support; they realize that the positive impact on confidence and positioning is likely very limited. In contrast, the fallout from disappointing those that are growing dependent on outside support is so great that it would be taking a major risk to position against such a scenario.
Will Fed Chairman Bernanke use this forum to announce QE3 or not? That will be the question that keeps the dollar and underlying risk appetite frozen. Though, in the meantime, any headline that is remotely related to this upcoming event (or that can be interpreted as having some form of connection) can still generate a considerable level of volatility. Monday, St. Louis Fed President James Bullard was messing with the scales when he pulled back slightly from his hawkish bearing by saying he could back the FOMC to take action should growth weakened “substantially” and inflation began to turn to “deflation”. That said, he noted that he still expects stronger growth through the second half of 2011.
Euro Traders Too Distracted to Take Notice of ECB Buying
Traders are already discounting the efforts of the ECB and the deterioration of financial conditions is in the Euro Zone; so when there is something else out there that is stealing the financial headlines, it isn’t difficult for their attention to stray. That said, the possibility that the US will pursue further stimulus (potentially bolstering investor confidence and weighing the euro’s primary counterpart) makes for an understandable distraction. Yet, despite the diversion, we should not overlook the headlines this morning. The ECB reported that they had purchased another 14.3 billion euros in government bonds last week – suggesting the financial troubles are still severe. In other news, the Bundesbank’s August outlook rebuked calls for further accommodation for profligate EU members without a commensurate surrender of national fiscal sovereignty. In the upcoming session, we will gauge the economic ramifications of market troubles in PMI figures and investor confidence.
Swiss Franc Peg Murmurs Continue as SNB Remains Mum
A newspaper poll this weekend reported that 63 percent of Switzerland supports the SNB’s market operations aimed at restraining the franc’s dramatic rally and 27 percent even believed that the central bank should adopt a target. Speculation that this is exactly what the Swiss authority would do was sustained over the weekend; but skepticism is firmly planted. We may need a stark franc rally to force the SNB into action.
British Pound Hears BoE’s Broadbent Lower Growth Outlook, What about Weale?
We are seeing a slow transition for the pound from a passive/reactive currency to an independent driver. The change lies with monetary policy expectations. Interest rate expectations have turned mildly dovish recently; but we are still a long ways from seeing a bond purchasing program expansion being priced in. BoE’s Broadbent pushed this agenda forward Monday; but Hawkish-man Weale will have more influence here.
Canadian Dollar Readies for Potential Short-Term Volatility with Retail Sales
The Canadian dollar is looking at notable event risk in the coming session: the June retail sales figures. These figures are certainly market moving from a short-term perspective; but the lasting effect will be sidelined by the preoccupation with the United States’ troubles. However, as the economic counterpart to the US, an improvement in Canadian domestic growth could certainly help the loonie fortify its position.
Australian Dollar: One of the Few Currencies that Won’t be Manipulated?
Australian Treasurer Wayne Swan started the week for Aussie traders by saying policy officials were not considering intervening on exchange rates. If that is true, they would be one of the few. In effect, authorities don’t need to act to manipulate the markets because a sustained downturn in risk appetite will naturally weigh the currency lower. Add to that 12 month expectations for more than 150bps of cuts and they’re set.
Gold Surpasses $1,900 – QE3 Speculation Will Only Accelerate the Move to $1,200
Another benchmark has been surpassed in the unstoppable performance of Gold. The metal overtook the $1,900/oz figure just after the US close Monday. Uncertainty as to whether QE3 is adopted or not doesn’t necessarily sideline this safe haven. Should the program be adopted, the deterioration for the dollar would be bullish. Should it be passed, risk aversion could leverage its safety appeal.