Fed may consider QE3…

Despite a lot of criticism of a recently completed quantitative easing program the Fed still considers further expansion should the economic conditions deteriorate – that was the message sent by the Chairman yesterday in the testimony. In our judgment such move would be extremely risky as prices of commodities (especially oil) wouldn’t adjust to the deteriorated macroeconomic picture, posing even a higher threat to the economic growth in a longer term. We would also like to point out that while the Fed said it could implement some kind of expansion it doesn’t necessarily mean that it will: Bernanke underlined risk of deflation which currently is not present and the hawkish wing of the Fed would probably opt to block such a move unless there is a real risk of the recession/deflation. Nevertheless, a mere mention of such a possibility means:

• An additional pressure on the USD especially against currencies like CHF, JPY or CAD
• A fuel for a renewed rally on precious metals and a factor reducing a risk of a larger correction on industrial commodities (at least in a near term)
• A support of equities – even if the data continue disappointing (and they well may) the market impact will be amortized by hopes for an additional stimulus

…and Moody’s downgrading the US

An euphoric reaction on Wall Street following Bernanke’s speech didn’t last long as the bulls were hit by a statement from Moody’s. The agency took the US rating under observation for a possible downgrade unless the debt ceiling is lifted on time. So far this is just a kind of a pressure on US politicians but there is obviously a risk: one should remember about a failed vote on the first version of the Paulson plan and the pain it caused to the already beleaguered markets. Moody’s added to a pressure on the dollar and while on the EURUSD we might have a lot of swings as the situation in Europe evolves, the picture on pairs like USDCHF and USDJPY looks one sided until we see some improvement in the sentiment.

Silver – getting bullish again

A ray of hope for the QE3, the dollar losing again and gold market hitting fresh all time highs – all those factors are positive for silver and make investors forgetting recent troubles on this market. Actually, technical picture looks bullish as well. A price of silver left a declining channel last week and confirmed bullish aspirations by drawing a hammer on top of this channel on Tuesday. That in turn was confirmed by a long white candle and a rally past a resistance at 36,78. There is a final obstacle left – a resistance at 38,80 (local highs from May) – if it gets broken, silver will be free to rally again.

Events to watch – US data and Bernanke part2

Bernanke’s speech today shouldn’t have a huge impact anymore so the market will be focusing on the US data (on top of any news coming from Europe or regarding the US debt ceiling). The data package – released at 8.30 ET (14.30 CET) will include claims (consensus 415k), retail sales (0% m/m headline, +0,1% m/m core) and PPI (-0,1% m/m headline, +0,2% m/m core).      

Przemysław Kwiecień PhD, Chief Economist

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