Sept. 19, 2012
-- The basic case for the Federal Reserve’s third round of quantitative easing is simple and airtight. The fine print is more complicated, and the Fed’s inability to explain itself makes this worse but don’t let the details obscure the main point. QE3 was the right move. The U.S. economy needs QE3 because it is suffering from a deficiency of demand and because the Fed’s policy interest rate is already at zero. It also is the right decision because the paralysis in Washington rules out the first choice under such conditions: further fiscal stimulus.
The Bank of Japan expanded its easing program in an effort to prevent a rising yen from undermining an economic recovery, following measures from the U.S. Federal Reserve last week to stimulate growth. The central bank increased its asset-purchase fund to 55 trillion yen ($697 billion) from 45 trillion yen and its lending facility was kept at 25 trillion yen, according to a statement released in Tokyo today. Five of 21 analysts surveyed by Bloomberg News predicted easing while 11 forecast the action by October.
Spain hasn't submitted a formal request for EU bailout yet, despite being prompted to do so as soon as possible. Rajoy is first trying to pacify markets by promising to detail new reform measures by the end of this month, including a possible increase in the retirement age, shift toward consumption taxes and deregulation of closed professions. If that’s not enough, he will have to decide on the size of a bailout, with Germany advising against a full rescue given he has already secured 100 billion euros for banks. On the other hand, If Spain does hit the aid button; attention would shift to Rome where officials so far deny the need for help even as an austerity-driven recession deepens. Monti is now overhauling the labor market by easing the rules on firing workers during difficult economic times without the risk of a court ordering their reinstatement. While, Greece is winning some respite and may get easier terms as Europe’s chiefs try to cement the market rally and keep from reheating the euro-exit trade. A verdict on the country’s fiscal plans will now wait until October when European leaders next gather.
EUR/USD: The EUR/USD was trading higher at 1.30703 at the time of writing after the BOJ left rates unchanged and said it will add 10 trillion yen ($127 billion) to its 45 trillion-yen fund that buys assets including government debt. However, market sentiment remain fragile on the uncertainty prevailing as to whether Spain will request financial aid and give the European Central Bank the green light to buy the country's sovereign debt. Moreover, the economic situation of Italy and Greece is also weighing. Events likely to affect the movement of the pair on the European session are; ECB Governing Council 2 day meeting starting today and the sovereign debt auctions in Germany and Portugal. While on the American session, the U.S will release the Housing Starts, Building Permits and Existing Home Sales data. New-home construction in the U.S. probably rose in August to the highest level in almost four years, showing residential real estate is sustaining a recovery even as the broader economy sputters, economists said before a report today. Builders broke ground on 767,000 houses at an annual rate, up from 746,000 in July and the most since October 2008, according to the median estimate of 85 economists surveyed by Bloomberg News. Another report may show sales of existing homes advanced for a second month. If the reports arrives as economists have predicted its might be bullish for the USD. The resistance level is at 1.31188 and the support level is at 1.29785.
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