Darshan's Blog

Darshan's Daily Market Ponderings

Japan QE Confirmation - Stimulus or Currency Intervention Bluff?

Tuesday 1st December, 2009

Morning all!

Right, the market has bounded up from the 10260 low on the Dow yesterday - was expecting lower first but it seems the new month money hitting the market, has caused a mini pump overnight. I am still anticipating a move lower over the next two days towards 10050 but for now, let the first of the month brigade have their fun. (Remember this is just the short term direction - I still expect new highs in all markets in December -we won't have the crossover on the weekly MACD couple with divergence, until that happens). More importantly, what caused the pumps to go off overnight?

Simple - the specifics of the Japanese monetary plans talked about yesterday, were revealed overnight. The announcement by the BOJ, jolted the market into action overnight with the Nikkei rising over 2%. The QE measure to offer commercial lenders 10 Trillion Yen ($115bn), to create liquidity and stimulate the economy, is as discussed yesterday a serious gamble. QE has never worked in Japan and if anything it has just created a mess with the Yen carry trade. Is this new move going to work? Who knows - all I know is that the Japanese are doing this, not just to fight deflation by getting the money multiplier into gear but also to weaken the Yen. The chances of the former working are debatable but the latter, is clearly not working just yet. As the news has come out the Yen has risen, fallen, risen and just basically stayed range bound. So far we have risen on the USD/YEN pair from the lows of last week and are currently at 86.73 - but we really ought to be breaking way higher. (Remember the USD/YEN pair stood at 123 back in early 2007 and 101 earlier this year - so there is some serious need to weaken the Yen).

If I was a gambling man, I think the forex players are viewing this as a short term bluff and are waiting to see what the other side of the coin - the US Fed does to strengthen the dollar. After all, the Japanese measure will happen in 3 month blocks - so it is very possible, that they will drop the policy, if the Federal Reserve signals anything that would cause a short -covering rally in the USDX. The hope is the Fed doing so, would not only weaken the Yen against the dollar but also signal that the Fed think that the US economy is truly improving. All in all, the increased income flows from higher exports, should outweigh the possible impact of a QE gamble. We shall wait and see.

Today we the US ISM Manufacturing figures (10am EST) which should help set some sort of tone. The consensus is looking for a fall to 54.8 but hey we could get higher at 55, if there has been even marginal output growth in the last month. The bigger number is the US Pending Home Sales. Forecasters are looking for a fall to 1% growth, as we got quite a boost in September with a 6% increase. Of course, this is all down to housing tax credits and also investors buying up inventory on the cheap, in the hope they can spin it in a few years time.Either way, both data sets come out at the same time and should provide some volatility.

The next question is whether this overnight pump can be faded with a stop above 10500? I believe it can (for now). It seems days after the world almost ended again (yawn), everyone has forgetten about Dubai and the RBA even hiked Aussie interest rates to 3.75% last night. Clearly risk is back on in the market or this is a short term bluff? Read on and find out.

The reason that I am fading this move up is because the near term bias is still down and look, the retail sales figures were pretty weak - not enough to give the bulls enough guts to take this higher with any conviction. The bollinger bands on the daily are also tightening, so we should get some range bound trading and then after the dip, we get a breakout to that new high in a forceful final push. Essentially at the very minimum, I would expect the market to use this week as an opportunity to test the futures low from last week, during the cash session.

So I am going to leave you on that note. Stay nimble this week!

Darshan

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