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Key Reports (WSJ):
10:30 a.m. Apr Dallas Fed Mfg Production Index: Previous: -22.3.


What is the matter, my lord?

Between who?

I mean, the matter that you read, my lord.

Slanders, sir; for the satirical rogue says here that old men
have grey beards, that their faces are wrinkled, their eyes purging
thick amber and plum-tree gum, and that they have a plentiful
lack of wit, together with most weak hams; all which, sir, though
I most powerfully and potently believe, yet I hold it not honesty
to have it thus set down, for yourself, sir, shall grow old as I am, if
like a crab you could go backward.

[Aside] Though this be madness, yet there is method in’t.

                              Hamlet Act 2, scene 2, 193-206

FX Trading – Method in QE Madness!
Liquidity is the mother’s milk for stocks.  Quantitative Easing is providing lots of milk, it seems.  Below an excerpt from a research note by Manoj Pradhan & Joachim Fels of Morgan Stanley [our emphasis]:

“Purchases of government securities and risky assets by the Fed, the BoJ and the BoE are slowly but surely delivering the double thrust of an expanding money supply as well as lower yields and tighter spreads. However, markets have not paved the way unquestioningly for these unconventional measures. Money supply growth in the US has eased somewhat since the start of the year even as the Fed has stepped up the size of its ‘active QE’ programme. Further, 10-year Treasury yields have backed up to within 10bp of the 3% mark, up from the lows of nearly 2% at the end of last year and also up from the 2.5% level reached when plans to purchase Treasury securities were announced on March 18. Are these developments reason enough to doubt the success of QE? Or do they suggest that the Fed now has to do more to get QE back on track? The answer to both questions, in our view, is no. The majority of the active QE programmes by the Fed and other central banks are yet to be implemented, with further enhancements in the size and scope of these purchases still possible. The global, synchronised nature of these unconventional measures is also important because it brings into play the strong links that are present among international financial markets.”

US 10-yr T-Notes Daily:

Bonds are up on swine flu fears this morning, but key support looms!

And if we look at the fall in bond prices (higher yields) triggered by QE and more liquidity (can’t make this up), you can see how it has some correlation with the bounce in stocks (stocks being the key global risk thermometer). 

Effectively these two price series taken together suggests people are moving from their bunkers of “return of capital” and seeking scraps of “return on capital.” 

Bringing this back to the dollar: If QE continues to spur risk appetite, the buck may be in trouble for a while, but of course there is nothing yet set in stone that says the correlation between stocks and the buck can’t change.

Stay tuned.  QE to the rescue!