Crude breaks $60, sends high-yielding markets surging:
Once again crude led the charge in today's trading to the benefit of higher-risk, higher-yielding markets. As forecasted last night in the update, today would be the day crude breaks the $60 level and we saw this play out as crude sliced through $60 and settled above $62, gaining almost 3.25% on the day. Consequently the dollar took a nasty beating across the board, especially to the higher-yielding pound sterling and euro. The dollar lost 1% today on the USD Index and put in it's worst performance against the euro since this January.
But the real news of the day is the shocking and confusing messages sent by the Fed via the FOMC Meeting Minutes...
Fed shakes up markets with mixed messages:
I wasn't expecting too much of a reaction to the FOMC minutes unless they said something unforeseen or shocking and sure enough, we got an unforeseen message that the markets were not expecting and which came as a shock...
The first message the Fed gave to the markets was abundantly clear -- keep selling the US dollar. And that's exactly what the markets did as soon as the minutes were digested by participants, which only took about 90-seconds as the message was obvious. The Fed said they saw the potential need to monetize more government debt. In other words, the Fed said they may expand their forced currency devaluation through quantitative easing (buying US Treasuries).
Why this came as such a shock is because the last time we heard from the Fed on this issue, they clearly told the markets that their $300 billion program to buy Treasuries would be enough to meet their objective and now the markets are hearing otherwise.
Confusing rhetoric from Fed--
That rhetoric about further monetizing debt hammered the dollar in the FX market but the Fed's other rhetoric rocked the equities market, sending the S&P 500 futures back down to the 900 level and causing a sell-off on the S&P 500 cash market and on the Dow.
For at least the past month everything we've been hearing from the Fed about the US economy has been upbeat, positive, hopeful, and optimistic. Some of the FOMC members, including Bernanke, have even hinted the economy has bottomed and is in recovery mode with brighter days ahead. Well, the Fed completely contradicted all of their recent rhetoric in today's FOMC report and that's exactly why Wall St. freaked out into the close...
Here are some of the contradictory messages in the FOMC report:
- Deeper recession in 2009; slowed rebound in 2010
- GDP to decline 1.3-2% in 2009, grow 2-3% in 2010
- Unemployment rate at 9% or higher through 2010
- Raises Q4 2010 jobless rate forecast to 9%-9.5% from a prior forecast of 8%-8.3%
- Raises Q4 2009 jobless forecast to 9.2%-9.6% from a prior forecast of 8.5%-8.8%
- Fed agreed to hold decision on more securities buys to see how economy, financial conditions evolve
This is exactly opposite from what the Fed has been telling the markets in their recent speeches, especially the stuff about buying more bonds. It's like some kind of bipolar Jekyll and Hyde Fed we're dealing with now. So which Fed are we supposed to believe? The euphoric Fed that's been smoking their green shoots in a waterbong or the Fed that's painting a dismal picture of the US economy in order to justify future stimulus plans and forced devaluation of the dollar?
Which Fed do you believe?
I'm inclined to go with the latter. It's obvious the Fed wants the dollar to die and this is one of the main reasons why I've been telling traders in these updates not to buy the dollar against the majors. I'm even further convinced the Fed wants to see the dollar brutalized in the near-term. A strong dollar does the Fed and US economy no good right now. If the Fed or Treasury truly believed in a strong dollar like they sometimes say they do, their actions don't match their words at all, and it is their actions which carry more weight in my book.
Plus, by further monetizing debt it will help keep interest rates low and money cheap. That's another thing the Fed wants right now because low rates and cheap money acts as a catalyst to re-inflate the bubble which burst last year. The Fed doesn't want rates to rise because that could slow growth and recovery, especially in the housing market.
You have to keep in mind that the Fed are nothing more than price-fixers and price manipulators. The Fed doesn't actually do anything useful or proactive, their policies are which cause booms and busts and busts and booms... the Fed is their own cause and effect machine... the Fed is both the arsonist and firefighter. Nobody can fight the Fed, so if they want to monetize more debt to drive down interest rates and devalue the dollar, that's exactly what will happen. Bottom line, I think the Fed's monetary policy should always be a part of any traders game plan, especially in the FX market.
Nice graphic!!! 
