Election Jitters Have QE on Hold?
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If the U.S. President is truly the leader of the free world, if not the world itself, then the pronouncements of any U.S. Presidential candidate has to be taken seriously. Mitt Romney’s statement that he would fire Ben Bernanke if elected could be seen, along with choosing Paul Ryan as his running mate, as a way to assuage the ‘Ron Paul Right’ portion of the Republican Party to carry them with him to Election Day but I think it’s deeper than that. The FOMC’s decision to announce the latest round of QE was seen by Romney as a means to keep him from his lifelong goal of becoming President and he over-reacted.
Romney was no more going to rein in the Federal Reserve than Obama will, once he got a look at the real books and took in the entirety of the situation he would have inherited. The point is, however, moot since he lost the election last week.
Regardless of Romney’s motivations that statement put the planned print to oblivion on hold for a couple of months in the run-up to the election itself. The Fed wanted stability and has effectively gotten it all the way to the eve of the election. Announce QE and get everyone’s hopes up and allow the markets to fall from a higher point, creating enough uncertainty to keep Gold, Oil, Corn and Soybeans under control until after the election.
By doing this it also allowed even more cracks to appear in the system, but it did so in a counter-intuitive way. Similar to how the Swiss pegging the Franc to the Euro was not bullish for Gold when it should have been, the Fed and the E.C.B. announcing unlimited QE but not following through with it has undercut inflation-sensitive assets. Even though the SPDR Gold Trust (NYSEMKT: GLD) is up more than 8% year-to-date there is that feeling that Gold should be trading at much higher levels than this given how much risk there is and how much money has been printed to provide cover for the deteriorating banking system. Now that the election is over the trends can re-assert themselves.
I believe that Bernanke no more wants to print the Dollar into oblivion than Bill Maher wanted to see Mitt Romney as President. But, I believe he also knows he does not have much choice in the matter at this point. So, at each stage of the game he and the other major central banks will do so only with the greatest reluctance.
Judging by the data since the QE announcement there are a couple of observations that can be made.
- The Fed is definitely still engaging in Operation Twist as the 30 year bond refuses to break above 3% yield. The area between 2.9% and 3.0% looks to be where the Fed is intervening in the bond market.
- The Adjusted Monetary Base has not budged from its range between $2.55 and $2.7 trillion. If anything Bernanke and the FOMC have been shedding assets on their balance sheet since QEIII was announced.
From where I sit the Fed would not announce QE without actually pulling the trigger on it at some point. The gun is loaded and it’s going to get fired, the question is, of course, when? And the most obvious answer is after the presidential election is settled. Gold began moving higher on Tuesday evening the moment it looked like Obama’s re-election was probable. Practically, there is little either person can do in office other than green light whatever amount of QE will be needed to keep the system from imploding. The main difference will be the amount of fiscal sanity, if any, that is brought to Washington during the process and the perception of how much obstruction the Fed will encounter from the sitting administration.
The current rally in the U.S. Dollar will not last. The Fed will have to respond to the nearly $80 billion injected by the PBoC last week alone, which has not even budged the USD/CNY pair from the 6.245 level, as well as the ¥22 trillion announced by the Bank of Japan in the past three weeks. The conflict between China and Japan over the Senkaku/Daioyu islands has forced Japan to weaken the Yen (NYSEMKT: FXY) as trade with China has collapsed along with their GDP.
The wild card in all of this is the Euro (NYSEMKT: FXE). Last weeks’ close below $1.28 is short term bearish and sets up a potential move back to $1.25 on concerns over Greece and Spain as both countries continue to defy the Troika over their austerity demands. And with the news that the Swiss sold Euros, more than $12 billion worth, into the rally off of the July 23rd low at $1.20, one of the Euro’s pillars has been knocked out from underneath it.
But, for this to be the beginning of a breakdown out of the 2 month consolidation between $1.28 and $1.31, the Euro needed to close below $1.28 and it did, decisively at $1.271. The Yen pushed up against horizontal resistance at ¥80.50 and failed, pulling back to close this week at ¥79.41 which created a massive reversal bar on the weekly chart. While the Yen did not close below last week’s low of 79.28, it did violate that low and puts the USDJPY pair in a position to follow through to the down side this week and set up a trading range between 78 and 80.5.
When the Fed intervenes we’ll know it. The SE Asian tigers will signal to us what’s happening: the Singapore Dollar, Malaysian Ringgit and Thai Baht should all break near-term lows. The Euro will stabilize once the headlines calm down and the Yen, failing any further intervention by the BoJ, may push back towards the post-QE announcement low near 77.1.
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