Henry Liu
Former FPA Special Consultant
- Messages
- 473
FOMC will be releasing a statement along with the Federal Funds rate decision today, and it is very likely that the long anticipated QE 2, or second round of quantitative easing will be announced today.
Out of 56 economists surveyed by Bloomberg, 53 stated that an announcement of sort on QE will take place tomorrow, while 3 disagreed. However, don't be fooled by the majority rules in this case, because this is where it ends... Out of the 53 that agreed, only 29 believed that the Feds will announce a 500 Billion initial purchase, while 7 predicted a modest announcement of 50 to 100 billion of monthly purchases, with the rest (17) remain undecided.
This is a reflection of the uncertainty over FOMC's future monetary policy, as brought on by various Fed officials recent comments; First, we have Fed Dudley implying that a 500 billion asset purchases equals to about 50 basis points cut in the real interest rate, which was the reason why some economists became fixated on the figure 500 billion. Then, Fed Bullard in his CNBC interview talked about 100 Billion per month would be the logical plan, and that's why other economists are looking for the gradual monthly 100 billion treasury purchases. Note that 100 billion per month would cover all treasuries issued in a typical month, that's why this figure has a lot of merits.
Of course, also considering Fed offcials Fisher, Plosser, and Hoenig, whom have been either been unconvinced of the effects of further easing, or have been against it from the start, thus reflected in the undecided votes of 17 economists, or about 32%...
I think what makes sense to most economists is the fact that Bernanke implied QE 2 will be announced during the next meeting, but aside from that, we are left with a sea of uncertainty as we walk into this release...
Of course, market has fully priced in the 500 Billion initial purchase, and anything less than that, could help USD. As a matter of fact, I believe the primary driver for USD weakness is the threat of further stimulus, and not the actual stimulus itself. I've shared this with a group of traders early this week and I believe once the uncertainty is over, traders will re-evaluate the market and we could see some unwinding of USD shorts... Unless this announcement shocks the market by an initial purchase of 1 trillion or more...
So what is the plan for this release? Here's what I'd be looking for:
1. Size of QE 2 - If we get 500 billion or less of initial purchases, market would probably not move much... Although we could see some USD strength returning, because remember the market has been doing "buy on rumor," for the last 8 weeks, I believe "sell on news" is in order and USD is likely rally...
2. Duration of QE 2 - This may have little less effect than the initial purchases... The worst case scenario is an undetermined length of time, but I think the Fed will probably do a 6 months or 12 months arrangement, and market would probably not act up. Of course, the shorter it is, the better for USD.
3. Type of Assets - If Fed include Mortgage-backed securities and Treasuries, we could see some real positive reactions for USD and the general risk appetite sentiment. Although this would normally be negative for USD, but seeing how the greenback depreciated in the past 8 weeks, this news would definitely be positive for both USD and U.S. economy.
4. The "Extended Period" Clause - This is a wildcard thrown into the mix... Apparently about 15 analysts think that the Feds will take this opportunity to signal to the market that its monetary policy will be more flexible after the announcement of QE 2. If they do remove that clause, expect market to really jump in on LONG USD.
I'd be looking at both USDCHF and USDJPY for possible trades in the event of positive USD news... I believe both pairs offer excellent potential for the long-term...
In conclusion, let me just paste the survey results from Bloomberg for those of you who are interested:
The questions were as follows:
1a. At the FOMC’s Nov. 2-3 meeting, will the committee decide to (choose one):
a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities
b) Increase the level of securities holdings through additional asset purchases
Result (56 replies): A, 3; B, 53.
1b. If you answered (b) to the last question, please provide your predictions on the following possible elements of the announcement:
a. The amount of additional purchases announced in billions
of dollars:
b. The length of time for the additional purchases to be
completed:
c. The types of securities to be purchased:
1) Treasuries
2) mortgage-backed securities
3) both Treasuries and MBS
4) other (please elaborate)
Result (53 replies): a) 29 expect $500 billion or more; 7 predicted monthly purchases of $50 billion to $100 billion without specifying a total; 12 predicted up to $500 billion; 5 didn’t specify an amount.
b) 7 predicted monthly purchases with no timeline; 9 predicted up to three months; 17 said between three and six months; 9 said between six months and one year; 5 said through 2011; 6 didn’t specify a pace or timeline.
c) 38 said Treasuries (including Treasury-Inflation Protected Securities); 13 said both Treasuries and MBS (including one that also predicted agency bond purchases); 2 didn’t specify.
2. Will the FOMC statement following the Nov. 2-3 meeting include any changes to the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Yes or no.
Results (49 replies): Yes, 15; No, 34.
3. Will the Fed decide at the Nov. 2-3 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.
Results (47 replies): Yes, 2; No, 45.
Thanks,
Out of 56 economists surveyed by Bloomberg, 53 stated that an announcement of sort on QE will take place tomorrow, while 3 disagreed. However, don't be fooled by the majority rules in this case, because this is where it ends... Out of the 53 that agreed, only 29 believed that the Feds will announce a 500 Billion initial purchase, while 7 predicted a modest announcement of 50 to 100 billion of monthly purchases, with the rest (17) remain undecided.
This is a reflection of the uncertainty over FOMC's future monetary policy, as brought on by various Fed officials recent comments; First, we have Fed Dudley implying that a 500 billion asset purchases equals to about 50 basis points cut in the real interest rate, which was the reason why some economists became fixated on the figure 500 billion. Then, Fed Bullard in his CNBC interview talked about 100 Billion per month would be the logical plan, and that's why other economists are looking for the gradual monthly 100 billion treasury purchases. Note that 100 billion per month would cover all treasuries issued in a typical month, that's why this figure has a lot of merits.
Of course, also considering Fed offcials Fisher, Plosser, and Hoenig, whom have been either been unconvinced of the effects of further easing, or have been against it from the start, thus reflected in the undecided votes of 17 economists, or about 32%...
I think what makes sense to most economists is the fact that Bernanke implied QE 2 will be announced during the next meeting, but aside from that, we are left with a sea of uncertainty as we walk into this release...
Of course, market has fully priced in the 500 Billion initial purchase, and anything less than that, could help USD. As a matter of fact, I believe the primary driver for USD weakness is the threat of further stimulus, and not the actual stimulus itself. I've shared this with a group of traders early this week and I believe once the uncertainty is over, traders will re-evaluate the market and we could see some unwinding of USD shorts... Unless this announcement shocks the market by an initial purchase of 1 trillion or more...
So what is the plan for this release? Here's what I'd be looking for:
1. Size of QE 2 - If we get 500 billion or less of initial purchases, market would probably not move much... Although we could see some USD strength returning, because remember the market has been doing "buy on rumor," for the last 8 weeks, I believe "sell on news" is in order and USD is likely rally...
2. Duration of QE 2 - This may have little less effect than the initial purchases... The worst case scenario is an undetermined length of time, but I think the Fed will probably do a 6 months or 12 months arrangement, and market would probably not act up. Of course, the shorter it is, the better for USD.
3. Type of Assets - If Fed include Mortgage-backed securities and Treasuries, we could see some real positive reactions for USD and the general risk appetite sentiment. Although this would normally be negative for USD, but seeing how the greenback depreciated in the past 8 weeks, this news would definitely be positive for both USD and U.S. economy.
4. The "Extended Period" Clause - This is a wildcard thrown into the mix... Apparently about 15 analysts think that the Feds will take this opportunity to signal to the market that its monetary policy will be more flexible after the announcement of QE 2. If they do remove that clause, expect market to really jump in on LONG USD.
I'd be looking at both USDCHF and USDJPY for possible trades in the event of positive USD news... I believe both pairs offer excellent potential for the long-term...
In conclusion, let me just paste the survey results from Bloomberg for those of you who are interested:
The questions were as follows:
1a. At the FOMC’s Nov. 2-3 meeting, will the committee decide to (choose one):
a) Retain the current policy of keeping a constant level of the Fed’s securities holdings by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities
b) Increase the level of securities holdings through additional asset purchases
Result (56 replies): A, 3; B, 53.
1b. If you answered (b) to the last question, please provide your predictions on the following possible elements of the announcement:
a. The amount of additional purchases announced in billions
of dollars:
b. The length of time for the additional purchases to be
completed:
c. The types of securities to be purchased:
1) Treasuries
2) mortgage-backed securities
3) both Treasuries and MBS
4) other (please elaborate)
Result (53 replies): a) 29 expect $500 billion or more; 7 predicted monthly purchases of $50 billion to $100 billion without specifying a total; 12 predicted up to $500 billion; 5 didn’t specify an amount.
b) 7 predicted monthly purchases with no timeline; 9 predicted up to three months; 17 said between three and six months; 9 said between six months and one year; 5 said through 2011; 6 didn’t specify a pace or timeline.
c) 38 said Treasuries (including Treasury-Inflation Protected Securities); 13 said both Treasuries and MBS (including one that also predicted agency bond purchases); 2 didn’t specify.
2. Will the FOMC statement following the Nov. 2-3 meeting include any changes to the following sentence: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Yes or no.
Results (49 replies): Yes, 15; No, 34.
3. Will the Fed decide at the Nov. 2-3 meeting to reduce the 0.25 percent interest rate on excess reserves? Yes or no.
Results (47 replies): Yes, 2; No, 45.
Thanks,
