Notes From Underground

The media voices that have plagued the markets for the last few days will have to take their seats as the FOMC delivers its rate decision and then a half hour later Chairman Bernanke will read a prepared statement which the algos will have two seconds earlier and a Q&A will ensue. My first question is why will Hilsenrath and Harding be called on by Bernanke to ask their questions when they purportedly already know the full extent of FED policy. I look for Ben Bernanke to be very measured in his words for he has seen the damage a misplaced adjective or verb can have on the market. Will the FED “taper”? I don’t know but look for the chairman to entertain a few questions about removing part of the present QE project.

The world, of course, awaits for any hint but all I can assure you is that VOLATILITY will be great. Prepare for wild price swings by having orders in to buy or sell at extreme levels–what I like to call wish orders. In today’s world of algorithmic headline readers, one or two key words will create huge price swings. I think the FOMC will say that the economy has tepid growth and the FED will want to see more robust economic activity to paring back some of the large-scale asset purchases. More interesting will be if the lone dissenter, Esther George of the KANSAS CITY FED, is joined by any new nays. If the vote has more than one no vote, the “TV analysts” will scream that the FED is moving closer to tapering–Mortimer Sell–so listen for the vote results to help get a sense of any pre-press conference dynamic movement.

***Our Man In Jerusalem: Today ECB President Draghi was at a farewell party for outgoing Bank of Israel President, Stanley Fischer. In a prepared speech, Mario Draghi made the following comment: “The ECB‘s Governing Council has stressed that monetary policy will remain accommodative for as long as necessary and let me say very clearly: WE ARE FAR FROM ANY EXITS” (emphasis mine). If Ben Bernanke had spoken those words, the U.S. dollar would have been sold immediately and remained under pressure. The EURO experienced a quick downward blip and then spent the remainder of the day rallying, making four-month highs against the DOLLAR. The EURO has been on a uptrend as frustrated EURO SHORTS are covering long-held positions. The fundamental traders have maintained that the economic fundamentals for EUROPE are so poor that the EURO would have to weaken.

THE MISTAKE OF THE SHORT EUROPE TRADE WAS THAT DRAGHI WAS NO BERNANKE OR KURODA FOR HE THREATENED MASSIVE QUANTITATIVE EASING BUT NEVER SPENT A EURO. IN FACT, SOME OF THE PREVIOUS QE PROGRAM–LTRO–HAS BEEN PAID DOWN, RESULTING IN LESS LIQUIDITY. The economic fundamentals of Europe are the worst in the world and eroding monthly and the EURO’S APPRECIATION is not aiding the ECB’s mandate. As the YEN depreciates against the EURO the pressure on the manufacturing base of Europe becomes even greater. The economic noose is tightening and Mario Draghi will have to turn rhetoric into action.

Further proof of economic contraction was seen on BLOOMBERG today that reported European car sales fell to a 20-year low. French and Italian auto makers saw drops of at least 10 percent–unemployed people do not buy new autos. Even deliveries in Germany dropped 9.9%, according to the Bloomberg story. President Draghi has had his way and can point to the rising euro as proof to the Germans that the ECB’s OMT and LTRO plans have not destroyed the currency, but the economic performance of the other parts of Europe is nothing of which to be proud. Interest rates across Europe are not the only area of fragmentation–27% unemployment in Spain and 6% in Germany–now that is fragmentation.

Tags: Ben Bernanke, Dollar, ECB, Euro, Fed, FOMC, LTRO, Mario Draghi, OMT, QE, volatility, Yen

This entry was posted on June 18, 2013 at 6:15 pm and is filed under Currency, ECB, Fed. 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.