FX Market Update

The Fed delivered opened ended QE3 today announcing 40bln in monthly purchases of mortgage backed securities, an increase of 45bln per month for Operation Twist, and low interest rates moved back to mid 2015.

The market reaction to this news was extremely choppy in EUR/USD as participants began to take large positions in both directions. When the rate decision came out, risk appetite began increasing across the board and about 30 minutes after the announcement, EUR/USD began climbing and briefly touched the 1.3000 level during Bernanke's press conference. The 1.3000 figure is not only psychologically significant, but it also serves as important resistance (previous support from the lows on 2/16, 3/14, 4/16). There are numerous stops above this level running all the way up past 1.3100, and I wouldn't be surprised if they are shortly run.

Let me be clear, I think that this move higher in equity markets is completely unsustainable. There's one big problem with Bernanke giving the markets open ended QE: he can no longer front run a new QE program. Market participants now have clearer expectations about what the Fed will do in the future. Expectations over what measures the ECB can take have also cleared up some. (No doubt all sorts of stimulus rumors will start flying the next time market conditions deteriorate in Europe though.) In terms of sentiment, I don't see what else market participants can look forward to that will result in a sustainable increase in risk appetite. I think attention now shifts to the U.S. fiscal cliff (USD bullish), and the U.S. presidential election (The dominant theme will be the economy = USD bullish).


Let me be clear, I believe that we will begin a trend of dollar strength (EUR/USD down) no later than Monday, Sept. 24th. 


However, I'm not sure whether or not we will get a final spurt up before the markets begin heading down. U.S. Equity Markets are currently hitting multi-year highs and I'm not stepping in front of this incredibly strong move. In my opinion, it's better to be a little late jumping on a trend than to try and call a top.


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