QE will take Place?

We will risk making a more or less real prediction only with regard to euro. Greece and EU once again made some agreements
The main event of the previous week: FRS predictably retained its interest rate and removed the term "patience" from its protocols trying to clarify the situation regarding increase periods and ... US dollar fell dramatically. Most traders and analysts were hardly "surprised" so much regarding the reduction of Fed's GDP growth and inflation predictions; however, the market response showed once again that large volumes are traded by automated systems and not by people. A massive collection of stops with a subsequent pullback took place. This is a fact: a huge number of long positions in USD before the meeting resulted in all currencies growing against dollar and most of all - against euro (4 figures). It is believed that it was caused by the change of statements – FRS's behavior is less aggressive and it is switching to standby mode, although visually, things are just the same – GDP, inflation, and unemployment must reach a stable harmony. It was the fresh wording "quite confident" that brought doubt to markets regarding an increase of interest rate in June, since there is no basis for approaching inflation and real economic growth.

Basically, the market was strongly affected by the question/answer combination regarding the prediction of interest rate value. It is interesting that Yellen said that "the increase could take place at any following meeting" - Fed's officials' personal predictions decrease continuously. Optimism is obviously going down; there is a tendency to postpone rate increase - we can always find grounds. Even in case of meeting old and new conditions, it is not sure if rates will be definitely raised. That means that while the market is trying to guess time frames, the opinion that this fact may not at all take place in 2015 (and even next year) is being carefully introduced into the information realm. And quite the opposite thing will happen - QE4. And that is exactly what is on US agenda, and all the games with rates is a usual, by the way, quite a large-scale manipulation. And there are several signs of that:

- It is clear now that it is not chronically cheap oil that is to blame in all problems. There is GDP fall for the 4th quarter, the problematic labor market, crisis of structural changes in industry;
- Strong dollar is actively killing exports, imports prices are going down and put pressure on inflation, which leads to the loss of corporate profit. Negative consequences have already manifested - the most optimistic corporate expectations are negative for the first half of the year, and annual growth is expected to be not higher than 1.3%;
- It is difficult to understand today what is overvalued among market assests and what is still on the approach. Stocks that grew previously, solely due to QE, are exposed to great risk of collapsing as a new bubble and, as always, in the moment that is the most uncomfortable for investors - most likely, by the summer;
- Multiyear low interest rates resulted in the situation when the whole economy is refinanced - from households to the government and corporations. Plans for their survival at higher rates are not even developed;
- It is absolutely unclear, under promised fund rates of 3.5-3.7%, which are announced by FOMC in the long-term perspective, how it will be possible to balance the budget, whose deficit is expected at the level of 20 trn in 2017;
- The commonly accepted method of reducing costs for government debt servicing in the form of monetization of more than 50% of the national debt is inacceptable for the USA, since it undermines the status of US dollar as the global reserve currency;
- If we really assess extremely weak macrostatistics (except employment) we will have to recognize that the American economy is rather weak than unstable today.

Sooner or later, the Federal Reserve will have to raise the rate. We would love to believe that the present speculations regarding the idea have not been ordered by large players in their attempts to unload their dollar assets at a more profitable rate. One more QE is obviously contraindicative for dollar.

We will risk making a more or less real prediction only with regard to euro. Greece and EU once again made some agreements; the details are foggy, but it has not affected the rate. Today's morning publication of statistics regarding Japanese PMI and Chinese HSBC Index does not really satisfy the market and there will be attempts again to sell off euro. It will happen especially in case German, French, and Eurozone PMI is below that predicted. We should not rely on strong numbers yet. However, the pullback will hardly be serious; most likely, distancing from multiyear minimums and predominance of purchases over sales will continue. The "tails" shown at FOMC were worked downward just in one day; however, large speculative purchases were arranged in 1.0650 zone again, and now euro is stubbornly proving that 1.09-1.11 levels are the most comfortable for it.

Author: Navsher Bartash,
ForexChief Currency strategist