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November 25, 2008

Fed's Quantitative Easing Extends Seasonal Reversals
by Ashraf Laidi

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 unrevised at -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.

Ashraf Laidi
CMC Markets
AshrafLaidi.com

Ashraf Laidi is Chief FX Strategist at CMC Markets and author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Copyright © 2006-2009 Ashraf Laidi

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