Wednesday, September 23, 2009

Fed Decision Today; Dollar, Bonds and Gold

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The FOMC concludes its two-day meeting today and will issue a statement around 2:00PM New York time. There is no chance the Fed will be tightening its zero interest rate easy money policy, although it may announce some vague longer term liquidity reduction that will take place at some indeterminate future date (like the IMF gold sale that was announced over and over again for more than two years before it actually happened). The Fed knows that without its super low interest rates the economy would go into a tailspin and the stock market would tank. Don't expect the Feds quantitative easing (aka money printing) policy, which is slated to be terminated at the end of October, to be stopped either. Interest rates would skyrocket overnight (treasury bond prices would plummet) and the U.S. wouldn't be able to fund its massive budget deficits. It is not likely there will be an announcement about this today however.

While easy money leads to stock rallies (and higher precious metals prices), it undermines a nations currency. The trade-weighted dollar hit a new yearly low in pre-market trading this morning. The ETF DXY had an ugly gap down yesterday. It was as low as 76.00 on Tuesday (a key support level) and fell to 75.89 in pre-market trading today. Ironically, this was the low one year and one day ago. Perhaps less ironically, I constantly see headlines cross my computer screen about the dollar rallying, but every time I look at the price it has gone down. Can the dollar hold its support in here? There are rumblings from the central banks in a number of countries about supporting the dollar in order to lower the value of their currencies. Look for some possible hints of this from the G20 meeting tomorrow, but don't expect action.

The approximately zero short-term interest rates in the U.S. has led to a carry trade. Traders sell U.S. dollars to buy high yielding currencies like the Australian and New Zealand dollar. This is one reason that Australian and New Zealand dollars have been going up in value. Currencies from countries with upgraded credit also benefit. Brazil just had its sovereign debt rating raised to investment grade. Don't expect the credit rating agencies to ever lower the U.S. sovereign debt rating to junk status though. This should have already been done.

Gold has continued to perform admirably. It has closed above its breakout level of $1003.50 for eight days in a row as of yesterday. The close on Tuesday was $1015.50. Silver closed at $17.16. There can still be some overhang on the precious metals market until the G20 meeting is over. Gold still needs to trade intraday above $1033.90 to finish its breakout. Hopefully soon.

NEXT: Market Sells Off as Dollar Rallies ... As Usual

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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