Gradual QE Measures Boost USD. Sovereign Concerns Resurface

ONG Focus | Insights | Written by Oil N' Gold | Wed Oct 27 10 23:14 ET USD short-covering dominates the market, though the situation is eased in Asian session today. WSJ's report that the Fed will begin QE2 with just a few hundred billion dollars of Treasury purchases over several months disappointed investors. Although the economic backdrop signals further easing is needed, stronger-than-expected headline data added to market concerns that the accommodative program will be mild. USD's rebound was further helped the resurfaced sovereign concerns in peripheral European countries as Portuguese budget talks collapsed. Commodities were weighed down by strength in the dollar. The front-month contract for WTI crude oil slumped to as low as 80.52 before closing at 81.94, down -0.74%. Huge crude stock-builds exacerbated the decline. Gold broke briefly below 1320 in NY trading session but managed to finish the day above it. The benchmark contract plunged -1.20% yesterday as investors exited long positions on a modest QE2 and potential US-China trade agreements.

Headline US data came in better than expected. Durable goods orders rose +3.3% m/m in September after contracting -1.5% a month ago. The market had only anticipated a +2% growth. However, the expansion came mainly from the transportation sector. Excluding it, the reading contractions -0.8% (consensus: +0.5%), following a +1.7% gain in August. New home sales exceeded forecast and soared +6.6% m/m to 307K in September, signaling the market has bottomed. Yet, further improvement should depend on how fast the employment market recover and this is also the Fed's utmost concern.

Problems in debt-ridden European economies were again under the spotlight as talks on Portuguese budget-consolidation plan stalled. The opposition Social Democratic Party opposed tax increases in the budget and called for deeper spending cuts while the minority government proposed to lower the wage bill by -5% civil servants earning more than 1500 euro a month, freeze hiring and raise the value-added tax to 23%. Meanwhile, Greek Finance Minister George Papaconstantinou said he has difficulties in achieving budget goals as tax revenue is falling short. Yields on Portuguese and Greek 10-year bonds surged, widening spreads with corresponding German bunds.

While tensions between the US and China have been the focus of the G-7 and G-20 earlier in the month, news said that the countries have come closer to a trade agreement. As Financial Times reported, Li Daokui, a member of the central bank's monetary policy committee and professor at Tsinghua University, said that the US and China have 'the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, according to an adviser to the Chinese central bank'. We expect the news is mildly bearish for gold as the metal has in part boosted by intensified geopolitical tensions and a potential 'currency war'. Yet, investors are not advised to overlook the tensions as whether there will actually be an 'agreement' is still uncertain. Even there is one between the US and China, it may not resolve tensions in the global context and a 'trade target' should be opposed by some other countries with surpluses.

 

Latest Analysis from this Author

Economic Calendar 11/1/10 (Sunday, 31 October 2010 14:44 ET)Weekly Fundamentals - QE2 Decisions the Key Event ... (Saturday, 30 October 2010 12:11 ET)Gold Weekly Technical Outlook (Friday, 29 October 2010 18:03 ET)Silver Weekly Technical Outlook (Friday, 29 October 2010 18:02 ET)Crude Oil Weekly Technical Outlook (Friday, 29 October 2010 18:02 ET)Natural Gas Weekly Technical Outlook (Friday, 29 October 2010 18:01 ET)Sentiment Sours ahead of US GDP (Friday, 29 October 2010 07:07 ET)Gold Soars as ECB Policymakers Warn about Currency... (Friday, 29 October 2010 00:39 ET)Economic Calendar 10/29/10 (Thursday, 28 October 2010 11:43 ET)Gold Daily Technical Outlook (Thursday, 28 October 2010 07:14 ET)

View the original article here