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Ben’s late for a very important date

I just left a bar to watch the Fed. C’mon Ben!..

FOMC Statement Late, But Imminent

Should be out any second now. Talk that Moody’s downgrade may have stalled decision. Longer wait could mean more action.

Update: it turns about the delay was because of a copier jam in the Treasury press room. You can’t make this stuff up.

Five Levels to Watch Ahead of FOMC

1)      75.95 in USD/JPY, it’s the all-time low reached Aug 18. Spot at 76.68

2)      1.3792 in EUR/USD, this is the close on Friday and would fill the gap. Spot at 1.3778.

3)      $1850 in gold. Everyone is talking about this level. If it breaks, we’re going back to the highs

4)      $90.52 in WTI oil. A close above this would be a big positive for risk appetite.

5)      1230 and 1188 in the S&P500. Moves above/below point to another 2-3% move in the same direction.

FOMC Trades: Bring Your Firearms

You’ve gotta have guts to trade this one with so many moving parts. It’s an easy one for the whales to exploit momentary the post-statement confusion but you can exploit those moves right back if you’re got the nerve and the quick trigger finger.

If you’re trading, think action versus inaction. Action is unreservedly positive for stocks and that ripples through FX as a positive for commodity currencies and negative for USD. If the action is weak today but the hints of future action are strong, that’s still a strong signal.

Gun to my head: this Fed always comes to the market’s rescue and I wouldn’t fight that trend. That bodes well for AUD, gold, stocks and short USD/JPY. I wish I could offer some trades with more confidence but this is virgin territory for everyone.

FOMC Preview: QE3

The chance of a QE3 announcement today is not insignificant. Traders have told me it’s as high as 10-20%.

I just don’t see it happening today but the trade would be same as QE1 and 2 and it would be epic. Stocks would soar, the dollar crater and gold would be on its way to $2000. If nothing is announced, expect a small dose of the opposite.

If QE3 isn’t announced, the market will be trying to read between the lines to see how likely QE3 is in the future. To me, this is the trade that will last beyond the initial knee jerk. If the Fed doesn’t step closer to QE3, stocks will kick and scream; the dollar will rally (esp. against JPY) and gold will be on its way to $1700.

FOMC Preview: IOER

To me, this is the real question mark. The market is estimating about a 30% chance the Fed cuts Interest on Excess Reserves from 0.25% to 0.10%/0.15%.

This is a risk. Talks is that it will bring down short-term rates but with 12-month bills at 0.08% and two-month bills at almost zero, the impact is questionable.

For FX, this is important because it has the most effect on USD/JPY. If the IOER is taken down, Japanese may no longer get a benefit from holding USD.

The risk is that there could be unintended consequences. PIMCO and others warned of this yesterday and it could mean problems in money market funds, fed fund futures and other short-term markets.

The trade is pretty straightforward to sell USD/JPY if this is cut. Since this is priced in, to some extent, USD/JPY will bump higher if this isn’t announced.

FOMC Preview: Operation Twist

Yesterday, we posted a review of what Operation Twist is.

The bulk of the pre-FOMC talk surrounds Operation Twist and I estimate an 80% probability of some type of Twist.

A Passive Twist would involve re-investing maturing securities in long-dated bonds. Maturities in the next 12 months total about $250B, so using those would be the minimum.

An Active Twist would involve selling short-dated maturities and investing more aggressively in the long end. This could push the total to $400B or higher.

The fx reaction will be minimal so long as the Twist for the next 12 months totals $200B-$400B. If it’s less than $200B or no amount is announced, the USD will rally as stocks sell off due to risk aversion. If more than $400B, stocks will rally and the buck will sell off on risk appetite and the feeling that QE3 has drawn closer.

Of course, there are many moving parts and the unveiling of a Passive Twist that sounds like it could morph into an active one, will be neutral.

I don’t think the bulk of the FX reaction will be tied to Twist, partly because it’s priced in. Other factors like IOER, QE3, the assessment and language will be more important.

Moody’s Cuts Wells Fargo, Affirms Citi

Brutal timing from those jokers. Citi’s short-term rating cut but the more important long-term rating affirmed.

T-Note Yield Hits Record Low

The 10-year Treasury fell yield just printed 1.87%. Looks like bonds are pricing in a higher probability of Operation Twist.

Risk assets falling on BAC downgrade.

Greece Working Hard For Bailout Funds

You have to believe it’s a certainty Greece will get the latest tranche of bailout funds after the latest headlines.

• Greece will cut pensions above €1200 by 20%
• Pensions will be cut further for those who retire before 55
• 30,000 civil servants will be placed on “labor reserve” this year
• Real estate tax extended to at least 2014

You also have to wonder about the wisdom of squeezing Greece so hard for every cent. At some point they’re going to overthrow the government.