SPR the New Global QE?

June 24, 2011 by Ashraf Laidi

In order to understand the SPR release of 60 million barrels, we must go back to the November G20 meeting when Asia/Latam Emerging Markets protested against the Fed’s November launch of QE2, dubbing it as “beggar-they-neighbour USD depreciation”.
It was no surprise that Bernanke did not dare utter the words “QE3” on Wednesday’s press conference. Yet, there was no need to refer to further easing when the FOMC already downgraded its growth outlook for the 3rd successive meeting

Unlike during the end of QE1 (Feb-Mar 2010) when the US economy grew robustly to the extent that the Fed raised the discount rate (Feb 2010) & USD was rallying partly at expense of Greek woes (the other part was due improved US data), the end of QE2 today is fraught with fiscal & macoreconomic deterioration.

This creates inevitable continuation of US quantitative easing (reinvesting principal payments), leading to support for commodities and risking inflation.

Fed policy means US imports deflation from Asia; Asia/Latam imports inflation from US è obliging EM to further tighten.

ONLY SOLUTION is for IEA (ie G20) to combat the macoeconomic symptoms of weak USD è to cap oil prices via SPR release.

 

We consider the IEA decision to have been partially prompted by the notion that a continuously falling USD would risk lifting US crude oil back above the $97 and onto the $100 territory as the Fed may be forced to renew its asset purchases.  Note how that right after Bernanke’s conference, WTI rose by more than $2.00 to 95.70s as the market deemed further stimulus to be inevitable.


The USD will need more than just bad news in the Eurozone
to accumulate any real rally beyond +5% bounce. What was mainly seen as fiscal imbalance weighing on the USD structural fundamentals is now compounded by widespread macro weakness, which will keep monetary easing weighing on USD.


EURUSD will continue hovering
between $1.40 and 1.45 as it awaits these key dates:


Do not underestimate China’s role in propping Europe’s debt
in return for Europe’s support for Beijing’s aspirations to have its currency (yuan) part of the news reserve currency order.

Notice how European nations are no longer dictating  Beijing over its currency policy, leaving only the US and Canada in doing so.

Latest Intermarket Charts

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The chart below shows the options volatility on EURUSD (an equivalent of the VIX for the euro). As the chart rises, euro riskiness (volatility) increases, which tends to drag euro down. Now how euro volatility peaked every 6 months. Each peak coincided with China declaring assistance for PIIGS bonds.


Latest Trading Ideas


EURUSD
Long EURUSD 1.4140-1.4200, for limit at 1.4240-1.4290, stop at 1.4100

EURUSD is increasingly confined between 55 dma (1.414) and 100 dma (1.4185) so trade according to this region.

Our Tuesday long EURUSD between 1.4290-14330 for limit at 1.4360-1.4410 hit all targets.


EURJPY

Long EURJPY 114.20-60 for limit at 115.00-115.40, stop at 113.40.

Our Tuesday long EURJPY between 114.40-114.70 for limit at 115.10-115.70 it all targets.

S&P500

Long S&P500 1270-1277, for limit at 1282-1290, stop at 1261.

Our Friday long S&P500 1265-1270 for limit at 1288-1295 hit all targets.
The 200 DMA of 1252-4 has held up perfectly (Thursday bottom coincided with the Thursday bottom in EURUSD)


FTSE-100

No trades

Our Tuesday long FTSE-100 at 5670-5690, for limit at 5740-5760 hit all targets.

Gold
Long gold at 1515-23 for limit at 1545-55 with stop at 1510

Tuesday’s long between 1534-37 for limit at 1545-53 it all targets as high was 1558.

We are still bullish gold medium term, but this is short term technical trade.

Silver

No trades

Friday’s long silver 35.40-35.80 for limit 36.50-90 partially hit target (high at 36.77)
US Crude (WTI) (see chart)

Long US crude 91.10-92.00 for limit at 93.20-94.70, with stops at 88.80.

Friday’s long oil 93.20-50 for limit at 95.00-97.80 was partially hit as the high was 95.70.