German Economic Minister Rainer Bruederle said: "An excessive increase in (the quantity of) money to me represents indirect manipulation," Article
This now lays the foundation for other countries to jump on this bandwagon. However, it will all be in vein as I don't think the US cares to listen to international pressures. Not just the US, but other countries like Japan mentioned that they will take necessary action if it is required.
One very vague statement from G20 meeting attempted to calm the potential currency war:
The G-20 agreed to “move towards more market-determined exchange-rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies," Article
With the pressure from the international community mounting on both China and the US it will be very interesting to see how QE2 goes down.
If they do announce a massive asset purchase program there is no doubt that the countries most hurt by this, emerging nations, will have to take serious steps to curb the rapid appreciation of their currencies.
The US' subtle admission of flawed policies
I mentioned that i would post my article when it was completed. It brings up an important point that is extremely relevant today.
Front page bottom right
I will not recap the history here, but one thing is clear, with the US attempting move the world towards more balanced trade accounts, it appears that this policy is exactly what they struck down at the Bretton Wood conference. As you can read, John Keynes proposed a system with this very ability to ensure that countries run a balanced trade account.
From what I see the US doing right now is that they are attempting to quickly reverse their trade deficit by devaluing the USD to bring more manufacturing jobs back to the US. This is in theory the "right" thing to do however, they are hurting everyone else in the process. China's peg was very clever because they apparently knew that the US was planning on doing these mass devaluations and realized that the only way to keep exporting is to peg the Yuan. I say Well played China, since this policy is a thorn in the side of the US because they don't have the flexibility as they hoped.
What I find very interesting is the fact that the population of the US are so opposed to Taxes but apparently don't care that their dollar has been and will continue to be devalued meaning that even though they have the same number of dollars the purchasing power of those dollars falls.
As you can see since the May Flash crash, the dollar has been hammered. The US in my opinion now realizes it doesn't want "world reserve status" since it causes a demand for the dollar every time there is a crisis or market instability. Which means right now they are concerned about ensuring the markets do not fall resulting in people not demanding the dollar as a "safe haven" which in turn results in more exports due to the low dollar.
What does this mean for the next 2 weeks, well Mid-term elections are coming Nov 2, as well as the FOMC meeting that should announce QE2. Remember since the market expect QE2 then, a large portion of QE2 has been priced into the markets, if the US heed to the emerging markets calls for less devaluation of the USD then QE2 amount will disappoint the markets resulting in a correction. If the US does a mass 2 Trillion (for example) QE, then we will see the international community turn on the US as a currency manipulator. I believe that the US doesn't want to shoot itself in the foot just yet, so QE2 will be less than expected in the markets however they will use language to reassure the markets that more will occur if required.
Notice on the UUP (dollar index) chart above 4 days ago the massive increase in the USD. This was directly caused by a Chinese rate hike as the two economies are pegged to each other. As one of the largest bond holders of US bonds it seems that China does not have an interest in seeing the USD plummet as it would result in a loss for China in purchasing power. Ironically it seems that the interests of the US consumer and the Chinese government are aligned.
Ciena update
Ciena unlike the overall markets just looks like it is in free fall. After breaking the 50MA it never had a chance to get back over it. The price closed on Friday at $13.80 below my put options strike price. The reason i believe the stock is chopping sideways is the Bollinger band. The theory states that the price action will remain within the bands 95% of the time (2 STD) thus buying above the Bollinger band or selling below the Bollinger band doesn't make any sense as you have 2.5% chance of the market continuing in direction of your trade. Now that the price action is within the bands again one could expect more downside or even a retest of the 50 MA which i do expect to hold.
S&P 500
The final chart I will go over is the S&P 500, I wanted to include the May flash crash again as a bottom scenario however it is impossible to predict another violent move. It is just interesting that the patterns continue to hold as it appears we are on our way to make a final push higher before a breakdown. Looking at the volume recently the past 3 positive days have resulted in diminishing buy volume. I do expect a slight push higher but we could start seeing strong selling as early as Thursday or Friday. The major line to watch is the 20 MA, once it is pierced, the market pressures will force a correction with support I think at the 200 MA which would be a logical place to see a correction. If the selling is orderly with the bottom having strong buying volume i will consider going long the market, however, I will probably stick with gold / silver plays and maybe some Chinese tech stocks.
Above is a weekly of the S&P 500, I just wanted to note a logical top of this rally would be the 1950 level +/- a couple of points. As this is the 200 MA, which was also the top in previous rally in May.
The most interesting thing that has occurred since Oct 19th (UUP increase/Market break down) is that gold and silver have not recovered but the markets have. Next week will be interesting but the following week with the midterm elections and FOMC meeting will be the major week to watch.
Lastly Fastest decline in home values since mid 2009
Might be a prelude to the upcoming housing numbers this week.
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