Fed's Quantitative Easing Extends Seasonal Reversals

by Ashraf Laidi
Nov 25, 2008 15:00 | 19 Comments

Today's latest liquidity drive from the Federal Reserve gives a fresh jolt to risk-seeking trades, extending my scenario of seasonal reversals in currency and commodity markets put forth last week, typical of the last 5-6 weeks of the calendar year, whereby markets reverse the flows prevailing in Sept and Oct. In this case, the lower yielding dollar and yen sustain fresh damage, reversing the gains posted in Oct and Sept. Such reversal is seen prolonged into mid December.

The Feds quantitative easing policy reaches a new landmark as the central bank announces the purchase of up to $500 billion in Government Sponsored Enterprise Mortgage Backed Securities (MBS belonging to Fannie and Freddie Mac) and an additional liquidity facility of up to $200 billion in new lending to consumer Asset Backed Securities in an effort to stabilize the securitized housing and consumer loan market. The Feds balance sheet has grown by over $1.3 trillion so far this year and is well on its way of following the Bank of Japans policy of quantitative easing-- targeting the quantity of money rather than its price.

The Feds latest announcement overshadowed the revised Q3 GDP report and a bigger than expected 17% decline in the September S&P/Case Shiller Home Price Index

US preliminary Q3 GDP was revised to -0.5%, while personal consumption revised to -3.7% from -3.2%.

Sterling surges to a 3-week highs of $1.5393 from a session low of $1.4980 largely on the Feds latest jolt of liquidity. Sterling was initially dragged by renewed remarks from BoE officials highlighting the need for further interest rate cuts as commercial banks were slow to pass though rate cuts. Cable breached the 38% retracement of the decline from the 1.6672 high (Oct 30) to the 1.4558 low, eyeing preliminary resistance at 1.5440. Support starts at $1.5240, backed by $1.5180.

EURUSD regains the $1.30 level for the first time in 3 weeks, boosted by fresh bids as orders reverse euro shorts partly on the Feds liquidity announcement and partly on what we have warned to be year-end seasonal reversal in currencies and commodities. We expect EURUSD to extend gains towards $1.3080, followed $1.3130. Key resistance stands at $1.33. German Q3 Final GDP fell 0.5% q/q and rose 0.8% y/y

Yen's declines are faring relatively modest in light of the accelerating declines in housing prices, offsetting the effect of the Feds announcement. Resistance seen standing at 96.60, followed by 97.00. Support crops up at 94.80.

The Canadian dollar accelerates its gains, dragging USDCAD from 1.2479 to 1.2124 mainly on the better than expected 1.1% increase in retail sales, and the 0.8% jump in core sales (ex autos), which was four times greater than expectations. CAD is also gaining on the jump in risk appetite, which is positive for commodities. I warned in yesterday's Intraday Market Thoughts of USDCAD reaching 1.24 on risk-driven reversal in currency and commodity markets. Accordingly, resistance seen imposing at 1.27, while downside target seen extending towards 1.20.

Comments (Showing latest 10 of 19) View All Comments
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Dec 5, 2008 21:52
Mak,

Looks like the seasonal reversal theory ran out of steam this week and maybe cable won't reach $1.60. This week's candle is quite bearish suggesting further downside next week to as low as $1.41 next week but I don't think we will see $1.37 this year. Instead, we could see a fresh run-up towards $1.57-1.59.

Ashraf
MAK
London, Great Britain
Posted Anonymously
11 years ago
Dec 5, 2008 16:33
Hi Ashraf,

Firstly welcome to UK!

Secondly do you still see seasonal reversals for cable in line with your article 'Beware of Seasonal Forex Reversals' on 19 Nov...it seems to be trending the other way? All the reading in the past indicated a big uptrend to 1.60.. now with the rate cut where to you see the bounce back upto. Do you still think cable will bounce back before trending down to multidecade support at 1.37?

Thanks and best wished

MAK
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Nov 29, 2008 10:12
Nour,

Gold seen retesting the $835 highs a break of which can call up $920. Im not too sure about oil but if the reversal thesis holds then we may see $63 per barrel, depending on OPEC. there are two meetings coming up...Cairo and Algiers.

Ashraf
Nour
Amman, Jordan
Posted Anonymously
11 years ago
Nov 28, 2008 15:35
Hello ashraf,

sorry for disturbing

but plz what do u think about GOLD and oil prices for the next couple of weeks

regards
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Nov 28, 2008 15:11
Thanks Vy, dont go long CADJPY. better to adopt bullish CAD vs USD near 1.2580s for target neat 1.22 and 1.20. Let's see what OPEC does/says in Dec.

Steve, bear in mind USDCAD is inversely proportional to shifts in risk appetite. OPEC isnt likely to cut production this weekend but may agree over a a cut later this month. 1.2580s should act as a firm resistance into next 3-4 weeks as long as stocks do not sustan fresh damage before year-end. We may have to retest 1.21 and go all the way to 1.19.

Ashraf
Steve
New York, United States
Posted Anonymously
11 years ago
Nov 28, 2008 11:14
Ashraf,

Happy holidays.

This usd/cad is tricky. What is your outlook of usd/cad short term (in dec)? Tks.
Vy
Petaling Jaya, Malaysia
Posted Anonymously
11 years ago
Nov 28, 2008 8:33
Hi Ashraf,

I am a beginner in forex matters and have recently been regularly visiting your website which is excellent and unbiasedlly informative. Thank you.

Given that USD will weaken in the near term (till early 09) per your comments in CNBC, does it make sense to switch JPY to CAD (77.25) now and then back to USD in Jan09 ? What do you suggest ?

Regards,
vy
Posted Anonymously
11 years ago
Nov 27, 2008 10:30
what about oil Prices and Gold whats the target
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Nov 27, 2008 9:01
Nour, Sorans,

GBPUSD will NOT have to drop to as low as $1.45 before attaining the targets I mentioned before. The seasonal reversal is clearly underway. Technicas in cable show the currency pair to have recovered from the bearish psychology... for now

There are TWO GOOD REASOS why USDCHF could go down: 1) seasonal reversal weighing on USD; 2) Geopolitical risk is GRADUALLY imposing its trace on the markets. 1.1930 very possible by day's end.

sorans
BEIJING, China
Posted Anonymously
11 years ago
Nov 26, 2008 17:01
hi,Ashraf
the usdchf has risen from 1.1820 to 1.2080 in 2 hours, so will it be up 1.2200 again or it is a good time to sell the currency usdchf?what is the reason? thanks!