Notes From Underground

Let us hope that the FED and Chairman Bernanke are not following Shakespeare’s most famous stage direction. Today, the FOMC released the minutes from the last meeting and as widely expected the predominant interest was in the discussion of the FED‘s exit strategies from the QE2 program. It seems that FED BOARD members were pushing the idea of raising rates prior to the unloading of assets that have accumulated on the FED‘s balance sheet. There were many opinions about the significance of the various proposals that the FED is considering, but it seems that the FED itself is very uncertain about which procedure will produce what impact.

The markets took the FOMC release in stride as it wasn’t strident in the need to raise rates immediately after the end of the QE program, so the EQUITIES rallied leading to profit taking in the NOTES and BUNDS. The DOLLAR weakened a little but was generally unchanged on the day even with a 1% rally in the EQUITIES and the COMMODITIES staged a sizable rally led by the GRAINS, SUGAR and ENERGY. The GOLD has traded soft for the last week as it has shown signs of some liquidation.

Even though the GOLD has suffered some sizable sell offs in DOLLAR TERMS it has yet to really give up its gains against the currencies. In my opinion GOLD will become corrective only when it gives ground against the currencies, especially against the SWISS and the AUSSIE. The SWISS, because GOLD and the SWISSIE both have haven status as a repository of value and the AUSSIE because of the high real yield on Australian interest rates. Thus, it is important to monitor support level on these GOLD/CURRENCY crosses to ascertain whether GOLD is truly entering a correction.

Some of the GOLD selloff has been attributed to rumors that the FED had the authority to influence higher margins on positions held in the OTC market. This is an interesting rumor as some analysts believe that the DODD-FRANK legislation does give the FED some power to set margin standards in the OTC market. I have not verified this but if in fact it is true, then the margin discussion begins more important than mere talking head chatter. (If any readers are knowledgable in this area please write a comment and share with all the readers of NOTES FROM UNDERGROUND.) The impact of FED margining authority on OTC positions would be a very critical development, but would probably prove a positive for the REGULATED EXCHANGES.

The power to regulate margins would put a power in Bernanke’s hands to make INFLATION “TRANSITORY” in the short-term. Beyond this notion, it is important to note that today’s FOMC MINUTES and its discussion of exit strategies had no effect on the risk on trades. The WASHINGTON POLITICOS AND THE FED GOVERNORS certainly hope that QE2‘s EXIT does not lead to a WINTER OF DISCONTENT.

Tags: Aussie, Commodities, Dodd-Frank, Dollar, energy, Equities, Fed, FOMC, Gold, grains, inflation, OTC, QE2, regulated exchanges, sugar, Swiss Franc, transitory

This entry was posted on May 19, 2011 at 3:43 am and is filed under Commodities, Federal Reserve, FOMC. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.