Watch out for Quantitative Easing moves

The stock markets were flat overnight in the US trading session (9 Feb 09) as little specifics were given in Pres Obama's speech on the stimulus package - and also that it has not yet been passed by congress.

Nonetheless, in a pre-emptive move on a quick passage, currencies moved. Risk taking came back into the picture as the EUR and GBP surged. The EUR closed at 1.3 from 1.28 while the GBP touched 1.5 at its high before closing nearer to 1.49.

Its interesting to note for a while now that the market reacts much more to good news than bad news as we're already immune to the bad and the ugly. GBP was helped by Barclays announcing that Q4 earnings were much better than expectations. Even in the face of a possible Quant Easing (QE) program (mentioned by Chancellor Darling on BBC yesterday), the GBP surged. If the UK government indeed goes down than path, I would expect the GBPUSD to sell off strong. Supply will overrun demand.

The US however, though is sitting on the fence on QE. They know that QE might weaken the USD. If you notice the rhetoric from Obama's admin and Geithner, they seem to favor the strong dollar policy.

Furthermore, Bernanke has previously took pains to explain the difference between Quant Easing and Credit Easing (which is what the Feb has been trying to do).

Credit Easing involves the increase of credit to consumers and businesses via the route of CP, MBS, ABS etc. The business of securitising is now the government's - well, who's left to do it?

Quant Easing would mean the government using its own money to buy up treasuries in the market, hence pushing cash into the system directly, increasing money supply. This would also help to increase the velocity of money in the system, hence boosting economic growth.

The credit situation has improved, credit to the Fed, but.... I wouldn't rule out the possibility of QE in the US going forward, if the situation gets much worse. Watch this space..

Keep a lookout for hints of that in case you're thinking of going USD long.