With the markets in a total slumber today it might be a good time to set a plan for what to do in the post QE environment. It seems from where I sit that the markets expectations on the size and extent of QE2 are too big and disappointment looms. My reasoning is perhaps one not considered stateside but is very important to Asia. Geithner was everywhere at the FinMin G20 meeting from a couple of weeks ago. It seemed that he was running the show and got the summit to change the wording of the communique from market oriented to market determined exchange rates…no mean feat. Also there was big discussions on trade imbalances and although nothing concrete was announced there remains expectations that something will break at next weeks g20 leaders meeting.

OK you might say but what about QE2. Well if Geithner is to have any show of getting the Chinese on board with a plan to correct trade imbalances then he would be dead in the water if the Fed delivers an expansive opened ended QE2 plan…”shock and awe” if you like.

Perhaps the cynical won’t agree but I am looking for QE2 “lite”. An initial amount ($400-500bln or $65 to 85bln a month for the next 6 months) then data dependent. This would cause a bout of US Dollar short covering but to what extent I am not sure. There is another point to consider …..there has been a lot of talk around the market that many players have squared up (short US Dollar positions) looking to take advantage of a buy the rumour (risk currencies), sell the fact type move. So if it comes in as expected ($500bln over 6 months but open ended) or on the “lite” side, US Dollar short covering might not be big as one would normally expect.