As the EU tries to get a plan together ahead of tomorrow’s deadline, markets continue to grind higher, taking out some huge levels in the process. This appears to me to be a seller’s strike in EUR/USD as there are simply no market participants willing to sell euros until the completion of the EU summit. Given the weak “solution” that will be delivered, I continue to believe that EUR/USD and Italian and French bonds will get crushed in the second half of this week, once event risk is out of the way. The plan is to sell EUR/USD at the close today with a 150 point stop. I have stopped out of the entire AUD short basket as my levels broke, copper has reversed dramatically and there appears to be insatiable demand for AUD related to short-covering and several M+A’s.
Something I haven’t been paying enough attention to: A weak dollar bias has been brewing in the background of the FX market ever since last Friday’s Hilsenrath article. Significant momentum has suddenly appeared for further Fed purchases of MBS as part of a coordinated housing plan. Is this the reason for the explosion in commodities and housing-related equities over the past few days? It does seem to be at least partially responsible – so this raises the stakes for next week’s FOMC.
This theme of QE3 seems to be flying under the radar a little bit but could take center stage soon. If the Fed were to enact further easing with inflation up here and the SPX at 1250, it would take its interventionist policies to a new pre-emptive extreme and it could bring the inflation trade back with a vengeance. I guess the chatter of MBS buying already has brought the inflation trade back, to a certain extent. If the Fed is willing to intervene in the economy even when it is growing and inflation is fairly high, this is a clear signal that nominal GDP targeting and further attempts to completely eradicate the business cycle cannot be far behind. Keep an eye on gold.
Year-over-year CPI change (United States)
Nomura Holdings, Inc. group