Will there be a surprise rally in the USD?

October 27th, 2010

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Everyone knows that the US Federal Reserve is going to print money (quantitative easing) in November. Hence, the financial markets have already priced that in. To them, this is a foregone conclusion. Surely, Bernanke is going to print trillions of dollars right? There?s no way he?s not going to do that right?

At this point, investors should be alert. When almost everyone thinks that a future outcome is a slam-dunk certainty, it?s the time when the market is most vulnerable to a significant setback. Since everyone is expecting that Bernanke is going to print so and so amount of money, and if it turns out that he is not printing as much as expected, the reaction by the financial markets can be savage. Any hints of dithering by Bernanke will be very negative for asset prices in the very short term.

Surely it wouldn?t happen right?

Well, who knows.

As the Americans accused the Chinese of manipulating their yuan, the Chinese will be accusing the Americans of manipulating their dollar through money-printing devaluation. Perhaps behind the scenes, both sides are negotiating a middle road. Maybe the Chinese will promise the Americans that they will appreciate their currency a little more than expected and the Americans will promise the Chinese that they will print a little less than expected. That way, the Chinese can cool their economy and pop their speculative property bubble while the Americans can benefit from a sell-off in gold and commodity prices and trigger a mad scramble for US Treasuries, which the US government will happily oblige because they are in need of cash to borrow.

Be ready for surprises!

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  • Berweg

    I am more then ready. I am long USD for about 1week now. And massively.

  • Pete

    Waaay too much volatility right now.

    Any type of investment feels like gambling for me. I don’t like it at all.

    Congratulations to anyone who can make money from it.

  • I agree Pete. Seems we’ve come to a point where market direction is determined purely by intervention and the expectation of intervention. I tend to think the USD will be in for a bounce later in the week also – you wont catch me punting on it though. Wednesdays nights Fed announcement should set the stage for the rest of the year.

  • Pete

    Yes, this ‘intervention’ is really messing up the markets.

    The RBA put rates up by .25% today, and our dollar is nearing parity again already.

    The people I really feel sorry for are the value investors. They are usually the intellectually astute, cautious, researching types who do well in tight markets. But all I can see at the moment is these types getting obliterated by irrational and volatile markets that care nothing for strong fundamentals.

    It’s a speculators market. It’s a shame that speculation also messes up the economy.

    On a side note, I’m still pro-gold. The way I see it, either:

    – USD surges, AUD wanes = high gold price in AUD
    – USD wanes, AUD surges = high gold price in USD, steady in AUD (assuming AUD doesn’t surge too much)

    There are all sorts of other combinations, some less promising, but the majority of them favour gold price in AUD IMHO.

  • Pete

    According to xe.com, the AUD hit 0.9999 USD today. Close…


  • We having rising price inflation on essentials, especially on utilities (electricity bills). Then we have rising interest rates and mortgage rates.

    The screws are tightening on consumers in Australia steadily.

    Breeding ground for steadily rising debt defaults.

  • Pete

    I wonder if the RBA think that defaulting mortgagees will increase GDP…

    Sounds like they’re playing a game that nobody can win.

  • Pete

    It went above parity. 1.0018 or something like that.

    Symbolic I guess. At least you’ll know who has no idea about economics by watching who celebrates this occassion.