Will the FOMC Announce More Quantitative Easing?

Well, that slippage that I was seeing yesterday morning turned into a dollar rally, and has continued throughout the night with the euro (EUR) losing 1 1/4-cents… It’s about the same with Aussie dollars (AUD), and the Norwegian krone (NOK), which I highlighted yesterday, and gave it the old “Pfennig kiss of death”!

The risk on/risk off trading pattern is turned to “risk off” today, as the FOMC meeting approaches, and the markets are full of jitters about what the cartel might say after announcing that they would keep rates at historic lows… I told you yesterday, that I really don’t see the Cartel announcing any new quantitative easing (QE) measures today, for they would seem desperate, scared, or jumpy – pick one, they all work! I say that because of the disappointing data that has printed lately, with the most recent disappointment coming from the Jobs Jamboree last Friday.

So… You have all this, let’s call it “soft data” to be fair, and then the central bank which I’ve been referring to as the “cartel” for some time now, announces stimulus measures… The markets would be running for the hills to get out of Dodge, and by that I mean dollars!

But… It looks like the fears of more QE are backing off, and therefore the dollar selling has backed off…for now… But like I said above (and yesterday), when the cartel does announce more QE (and they will), the dollar will get sold like funnel cakes at a state fair!

Going into this morning’s US Open (and not the gold version!) stock futures are off pretty strong, so that doesn’t bode well for a reversal of the risk off trading today.

In news that will make the likes of Mssrs Graham and Schumer very upset… China’s trade surplus reached an 18-month high… And guess what the Chinese officials did? Give up? Come on, if you’re a long time reader, you know how the Chinese like to rub everyone’s face in their weak currency… So… They announce an 18-month high for their trade surplus, and the Chinese set the reference rate for the renminbi (CNY) lower… Now that ought to tick some people off this morning in Washington DC, eh?

One thing that the Chinese naysayers will point to is the fact that the trade surplus number reflected a weaker imports component… And the naysayers will say that the Chinese economy is weakening, and still ready to collapse… Again, I’ll spell it out for these knuckleheads… “Moderating” is what the Chinese economy is doing… And “moderating” is a far cry from “collapsing”!

And the “moderating” in China still puts a damper on global growth prospects, and when that happens, the proxy for global growth, Australian dollars,  gets sold.

I think this is more of a short-time trade though, as we could very well just put all this in the rear view mirror and begin to sell dollars once again this afternoon, depending on what the cartel’s leader, Big Ben Bernanke has to say.

OK… I’m not a fan of The NY Times, for a number of reasons, and Sunday’s edition with an op-ed piece by Treasury Secretary Tim Geithner titled, “Welcome To The Recovery,” is about the last straw for me… I don’t know who to blame more for being so irresponsible… The NY Times for printing a story that is the opposite of what most economists now believe (which is that we’re heading toward a double dip recession), or the Treasury Secretary for writing it!

Memo to both of these parties… Did you see the rot on labor’s vine was last Friday? Or… That confidence among US CEOs fell this quarter for the first time in a year? Or… Have you not seen the housing data lately? Or… How about the fact that the number of Americans who are receiving food stamps rose to a record 40.8 million? This is up a staggering 44% from the May 2008 figure of 28.4 million. More than one in every eight people in the US is on food stamps. Participation has set records for 18 straight months, and the figure is projected to rise to 43.3 million in 2011!

I could go on and on, like the Energizer Bunny with these reasons that the recovery isn’t any such thing, but that would not help things any… I don’t want to get depressed any more than you do!

I’ll end this discussion on the US economy with a snippet from a story I read in Bloomberg this morning titled, “San Francisco Fed Scholar Sees Chance of US Recession Relapse in 2012.”

OK… In Japan overnight, the Bank of Japan (BOJ) left rates at 0.1%, and did not change their outlook for the Japanese economy, which is to say that the BOJ members do not see the Japanese economy gaining any strength… But still the yen sits at 86, and is the best performing currency this year… That just doesn’t make any sense, folks, but it is what it is, and it’s all good for yen! I don’t see the BOJ intervening any time soon either! And that means smooth sailing for yen (JPY)…

But just remember this… The BOJ has been known to pull the rug from many a yen holder over the years, and just because I don’t see them intervening right now, it doesn’t mean they won’t… And the BOJ loves to leave a trail of tears for yen investors.

So, when I look at the top two performing currencies year-to-date, I see yen at the top – as I said above – but I also see Singapore dollars (SGD) in second place… Now, I’ve explained this before with Sing dollars, but for the new kids to class, they might want an explanation, so here it goes… The sing dollar is a “managed currency”… The Monetary Authority of Singapore (MAS) sets the levels, or “trading bands,” for the currency…much like the Chinese do, although the MAS has more latitude.

So… If the Sing dollar is stronger, it’s because of two things… 1. The MAS decided it was a good thing, and 2. Because the other currencies in Asia are stronger versus the US dollar. You see, these Asian currencies have to remain in competition with each other for exports, and therefore once currency can’t get too far out of line with the other Asian currencies…

Of course, if it were me… I would get my hands out of the cookie jar and allow the markets to do the work… But that’s just me, eh?

Then there was this… So… Did you see where the US Social Security Trust was a deficit? According to a story on Money.com, “This year’s cash deficit, the first since the early 1980s and the biggest ever, means the Treasury will have to borrow money to redeem some of the trust fund’s Treasury securities.”

Now I know that this announcement comes as no surprise to most people… But let me remind you of this little ditty… The real problem for the US deficit/economy in the future isn’t Social Security… It’s Medicare and Medicaid… But when you consider that Social Security’s deficits will begin running more than $100 billion a year deficits within a decade, it won’t be chopped liver on our deficit and economy!

To recap… The slippage in the currencies yesterday turned into a dollar rally with the risk assets turned to OFF today. I guess most people began to see what I saw yesterday morning, and that is that the Cartel won’t announce more QE this afternoon… (Saving it for a rainy day! HA) And… That thought backed out dollar shorts that were put on thinking more QE was on the way… (It’s still on the way, just not this afternoon!) China’s trade surplus hit an 18-month high, with imports declining, thus showing the “moderation” the economy is taking on. This “moderation” threw cold water on the commodity currencies, though, and the global growth thoughts.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning