Market Overview

QE3 to End in 2013 – Reaction and Charts

FOMC minutes yesterday revealed that “several” Fed officials found it “appropriate” to end QE3 before end of 2013, while “a few” would like to see QE3 follow through to the end of 2013, suggesting a high likelihood we could see bond purchases to end within this year.

S&P 500 moved accordingly, but reaction was relatively muted considering the rally seen on 2nd Jan.

http://forexblog.oanda.com/mserve/SPX_040113M30.PNG

Price failed to break the interim support formed at the start of the week, and stabilized just above 1456. This shouldn't come as a surprise as we've seen QE3 optimism (Sep '11) giving way to “Cliff” uncertainty last year, with S&P500 falling back to a low of 1345 (see chart below)

http://forexblog.oanda.com/mserve/SPX_040113D1.PNG

10y T-Note price broke the 132.50 floor despite the FOMC minutes. The reason for yield to increase could be 2 fold -

1) Speculators selling Treasuries knowing that the Fed will soon stop buying bonds

2) Optimism in the likelihood of market recovery after “vote of confidence” by FOMC participants

http://forexblog.oanda.com/mserve/10YTN040113D1.PNG

From a logical point of view, point (1) appears to be the main reason why yields increase. However, point (2) remain a strong plausible explanation when one take into consideration the muted response from S&P 500. If point (2) remain true, we could potentially see a strong bullish year ahead with or without QE3.

USD Basket (using fxUnity platform)

http://forexblog.oanda.com/mserve/USDbasket_0401131W.PNG

USD also strengthened significantly following the announcement, breaking the recent swing high. Without future easing, with US economy recovering and bullish potential in US equities, 2013 could see USD becoming more popular as funds flow back into America seeking higher alpha.

 

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