Ralph Shell @ 1:11 PM, Monday November 08 2010
Reception of Bernanke's QEII plan has been chilly. The German's finance minister Wolfgang Schauble summarily dismissed Bernanke's move saying, "With all due respect, US policy is clueless." The Chinese, holders of around $1T of US debt as might be expected, are upset with the devaluation of their USD investments and said as reported in Reuters:
"As a major reserve currency issuer, for the
United States to
launch a second round of quantitative easing at this time, we
feel that it did not recognise its responsibility to stabilise
global markets and did not think about the impact of excessive
liquidity on emerging markets," Chinese Vice Finance Minister Zhu
Guangyao said at a briefing on Monday."
The price of gold keeps climbing, crossing the $1400 barrier after Robert Zoellick, President of the World Bank suggested there should be a debate about the role of gold. Yes, and Treasury Secretary Geithner made the perplexing comments that it is in the US's best interest for the USD to remain strong. The forthcoming G20 meetings should prove interesting.
Markets are usually more fearful of the unknown. Weather we like it or
not the QEII has been announced, and the market looks ahead to solve new
mysteries. This morning the focus of the market has been the deteriorating quality of some of the peripherals debt in Europe. Irish debt in particular has been at the top of the euro worry list today. With Ireland 10 year bond yields approaching 8%, can it be long before their feeble economy is unable to avoid defaulting?
Greece and Portugal also remain problems, but euro leaders are especially worried that Spain, might be too big to bail out. With Spanish debt extending to banks well beyond their borders, this is a problem for all of Europe. On Thursday we get 3rd quarter Spanish GDP, which should have a definite impact on the euro. Friday is a busy day with the GDP from Germany, France, Italy Greece and Portugal all being announced. Soft numbers may cause currency traders to fret that euro growth is too feeble, and there may be other threats of sovereign debt default.
There are important reports pending for the USD this week. The US trade balance, estimated to be -44.8B is down a bit from the previous month's -46.3B. This report follows the Chinese trade balance report, estimated to be + $25.3B. Since Treasury Sec. Geithner has proposed trade balance as a percentage of GNP, as a way to determine currency values, these reports may become hot topics at the G20 meetings.
The $44B negative trade balance incurred by the US provides an export market for the world. To pay the tab for all these imports which creates a negative trade balance, the US needs to borrow lots of money. This week the US Government is selling $72B of notes and bonds. The first auction is tomorrow for $32B 3 year notes, followed by $24B of 10 year notes, and finally $16B of 30 year bonds. It will be very interesting to see how aggressive foreign buyers will bid for US paper after the QEII announcement. They may be weak buyers if they anticipate further dollar depreciation.
The sell off from last week's announcements may have run it's course unless we feed the bear some more bad news. Bad euro news, however may not show until later in the week, and the market has to digest mid week USD news. The market acts tired from the long run up from 1.30, but there may be too much uncertainty for a sustained run in either direction. Specs are big euro longs but despite the last two days sell off, they are still winners. Would look for support in the 1.3850 area, and resistance around 1.41. We are inclined to buy at the lower level and try the sell side on a return to 1.41.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.