QE2 Is Coming: Sell the Rumor, Buy the Fact?
Wed Oct 27–At the conclusion of the Nov. 2-3 FOMC meeting it is widely expected that another round of quantitative easing, or so-called QE2, will be announced in an attempt to stimulate the growing, but sluggish U.S. economy. In fact, Fed chief Ben Bernanke has been hinting at the potential for additional bond purchases since August.
Taking a look at the Treasury market, stock market and the forex markets, players do indeed expect QE2 and may have already priced that in, amid a drop in 10-year yields in recent weeks, a renewed rally in the stock market and on-going weakness in the U.S. dollar.
Seasoned traders are well aware of the old market adage: “buy the rumor, sell the fact.” Well, in terms of the U.S. dollar, the opposite may have been happing in recent weeks as traders have continued to sell the U.S. dollar, against a variety of currencies including the euro, in anticipation of renewed bond purchases from the Fed.
Since late August, the euro/dollar has climbed (and the dollar has weakened) from $1.25 to $1.41. Quantitative easing is, of course, bearish for the dollar as the goal is to lower interest rates, which decreases interest in buying U.S. assets, including its currency.
RIPE FOR CORRECTION?
The question is, at this point, have forex traders “sold the rumor” of QE2 and is the market poised to “buy the fact” or buy the U.S. dollar in at least in a corrective type of bounce?
BULLS LOSING MOMENTUM
After hitting a high at $1.41 on Oct. 15, the euro/dollar has shifted into a short-term sideways/corrective type of mode in recent days as upside progress has stalled. The Oct. 25 attempt at the upside was quickly snuffed out and $1.4080 remains a key near term resistance barrier.
Downside probing in euro/dollar in recent days has been met with success and a flood of near term profit-taking may be on the horizon. The market has posted a healthy run-up in recent weeks, as market players priced in the expectation of perhaps around $500 billion in fresh quantitative easing by the Fed. Relatively little pullback or correction has been seen as the euro/dollar has climbed higher in recent weeks. The path of least resistance could quickly shift to the downside for the euro/dollar, at least for a short-term bout of corrective profit-taking.
WAIT AND SEE
Unless the U.S. Fed surprises with a significantly new and unconventional QE2 package (which isn’t completely off the radar, Bernanke does think outside the box), a number of markets may be ripe for correction and profit-taking amid a “buy the fact” type of move.
RISK ASSETS VULNERABLE
Risk assets, such as the stock market, gold, high-beta currencies like the Aussie and kiwi/dollar could be set up for a profit-taking, corrective pull-back play, as the dollar bounces in a counter-trend move. Be ready