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QE to Infinity...and Beyond!

Last updated 9/13/2012 4:20 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

QE Infinitum

The North American markets have gone crazy as Federal Reserve Chairman Ben Bernanke and the rest of the Federal Open Market Committee announced their newest version of Quantitative Easing this afternoon. With the German Constitutional Court granting their approval for the European Stability Mechanism, China announcing additional spending on infrastructure projects and the Fed now introducing QE Infinitum, the stars have aligned to create a substantial risk rally across multiple risk assets. In the Fed’s long anticipated decision on QE, they decreed that they would be purchasing Mortgage Backed Securities to the tune of $40 billion per month in addition to Operation Twist that they launched in June. In total, the Fed will be increasing their holdings of longer term securities by up to $85 billion per month when taking both policy tools in to effect until the end of the year. The kicker (and the reason I gave it a QE Infinitum moniker) is that they did not mention an end date or a capped amount spent. They also said, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” The Fed is basically telling us that they are going to continue with this QE model until they are satisfied that the labor market has improved substantially. In Bernanke’s press conference afterward, the reporters were trying to get Bernanke to expound on what substantial job growth was in, you know, actual numbers, but the Chairman was an artful dodger and didn’t answer those questions with anything the public would be able to decipher in figures.

In reaction to the news, the EUR/USD rallied from 1.2860 up to 1.30 before some profit taking brought it off those highs. The 1.30 level may be difficult to break moving forward as this is a likely place that many larger short orders are stacked as my colleague Fawad Razaqzada explained earlier . When considering the historical perspective though, when QE2 was announced, the EUR/USD had a similar move up , only to retrace slightly, before another similar rise higher took hold. Pretty much all currencies against the USD are reaching substantially higher levels than when they started the day. Outside of the currency market, equities are soaring, precious metals are jumping, but oil has been rather subdued.

Yentervention

One of the unintended consequences of QE Infinitum is the potential drag on the USD/JPY. The Japanese government is not too fond of their currency gaining value. Being that their economy is heavily dependent upon their export sector; a rising Yen has adverse effects on the profit margins of those exporting industries. In the past, when the USD/JPY reaches levels that the Ministry of Finance deems outside of what the fundamentals dictate, they start talking about it. As my colleague Matt Weller noted earlier this week, they started talking about it, and we are very close to the USD/JPY intervention danger zone . While the USD/JPY has rallied off of its post FOMC lows, dollar weakness probably won’t be going away any time soon, and potential opportunities to benefit from the Bank of Japan’s aggressive stance could be substantial.

Looking Forward

Heading in to the Asian trading session, those investors who weren’t able to partake in the dollar selloff will probably join in the party. So I expect Asian equity markets to rise along with the continued appreciation of risk based currencies. The economic calendar is rather barren, so there likely won’t be any distractions to take away from the continued dollar selling; unless of course, the BoJ steps in and makes their presence known.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.