Thursday, July 14, 2011

Qantitative Easing 3 (QE3) Unlikely, but... 14 July, 2011

Though the hurdle to QE3 is exceptionally high, and Bernanke does NOT anticipate another round, he did not slam shut the door on doing more. The conditions aren’t in place, but they also can’t be dismissed. This seems to also be the situation in the debt limit debate. The widespread view is that the debt limit will be raised, and nasty alternatives can’t be dismissed, even if the chance is low. By leaving the QEIII door open, Bernanke gave hope to stocks, and weighed on bonds and USD.

The market tone was rather hopeful even before Bernanke based on China’s above expected Q2 GDP (9.5% y/y, cons: 9.3%) with cyclical/commodity currencies outperforming and the safe havens lagging. CHF though gained steadily through the NA session and is now at or near record levels versus USD, EUR and GBP. Comments by the SNB’s Jordan that raised the spectre of action should deflation risks re-emerge was completely overlooked, as the deflation risks have not re-emerged

EUR: As tends to be the case, watching EUR/USD can be like watching 2 punch drunk prize fighters leaning heavily upon one another with the occasional lurch around the ring. EUR/USD seemed to have given up as it slipped below $1.4000 and the 200-dma at $1.3910 yesterday. Today it looks reinvigorated, having rallied to just shy of $1.42 before fading when Fitch cut Greece to junk. Even so, EUR/USD is up 1.2%. As has also been the case for some time, EUR/CHF continues to struggle to sustain any rally. EUR/CHF remains near all time lows, below 1.16, but still above 1.15.

USD sentiment remains unsteady. US retail sales could be another millstone, if they come in weaker-than-expected. Watch Bernanke redux before the Senate to see if he ‘tweaks’ things should the Fed conclude that the market misinterpreted anything said on Wednesday. Do not expect him to change his negative view on gold as money, despite what Utah (and potentially 12 other states) and Ron Paul might say.

Gold: Though Bernanke doesn’t think its money, other’s still want more of it. Gold ‘took out’ the old high at $1575.38/oz with heavy open interest at $1600/oz acting like a magnet. That is, on top of any demand to mint coins spurred on by Utah and Senator’s DeMint, Paul and Lee’s Sound Money Promotion Act which states that gold and silver coins that are declared legal tender “shall not be subject to taxation.” Keep taking the tablets !!!!!

AUD & NZD: The minute Bernanke suggested that QEIII was ‘on the table’ (even if it is on the far edge and barely holding on) AUD (+1.5%) and NZD (+2.2%) bolted higher. AUD/USD which had stalled below 1.07, shot toward 1.0750. NZD/USD, which was making slow progress back toward 0.83, but powered to a high of 0.8385. AUD modestly underperformed and AUD/NZD slipped to 1.2850, which is within its recent range. NZ’s delayed Q2 GDP will garner attention today.

CAD: CAD was the only G-10 peer, apart from JPY that did not gain 1.0% versus USD. Even so, USD/CAD slipped below 0.96. CAD can’t really complain though. Even with the overnight moves, CAD has gained sharply versus EUR and SEK in the past several days, so a pause is warranted. AUD/CAD meantime remains confined by 1.0345 (the 50-dma) and 1.1083 (the 100-dma). The lower end came into focus briefly, but now the upper end is under watch. NZD/CAD remains locked in its 0.7850 to 0.81 range. There is little on the Canadian calendar until next week’s BoC FAD and MPR.

GBP: The jolt from Bernanke was slight, but GBP/USD bolted mid-morning NA time stops were triggered as $1.6010 was taken out. Earlier, UK claimant data were weak, adding to signs that the UK economy is ‘struggling’. An increase in the UK-US 1y1y forward swap spread from 63 (YTD lows) to 68, supported GBP/USD, while exposing that spreads remain a key vulnerability.

Published: 14 July, 2011

written by: Bill Hubard , Chief Economist at