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Expectations of Fed's QE continued to dominate movements of asset prices. While it's almost certain that the Fed will announce new easing measures at the upcoming FOMC meeting, the size and the timing have spurred rigorous debates in recent days. The dollar resumed weakness yesterday as the New York Fed surveyed bond dealers' expectations of asset purchases over the next 6 months. Losses were pared later in the day but mixed economic data failed to depict a clearer outlook for Fed's move. Commodities rebounded as USD fell. The front-month contract for WTI crude oil climbed higher and settled at 82.18, up +0.29% while gold rose strongly to a 3-day high before closing at 1342.5, up +1.50%.
BOJ's decision to bring forward the next meeting to November 4-5 signaled that the Fed will very likely to announce QE2 next week. While the dollar had rebounded amid worries that the program may be smaller than previously expected, renewed selling pressure was seen after a Fed's survey. The New York Fed asked bond dealers about their expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asked companies how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. Questions such as estimated changes in nominal and Treasury yields 'if the purchases were announced and completed over a 6-month period', with amounts ranging from zero, 250B, 500B and 1 trillion induced speculations that the Fed's measures may be aggressive.
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On the macro front, indicators showed some improvements in economies developments. However, it fails to provide a better gauge on the Fed's move. Initial jobless claims unexpectedly plunged -21K to 434K in the week ended October 23, bringing the 4-week moving average to 453K, the lowest level in 3 months. Yet, one should caution that the reading might have been distorted by the Columbus Day holiday. Kansas City Fed manufacturing index dipped -4 points to 10 in October but both 'new orders' and 'employment' improved, to +16 and +1 respectively.
Apart from QE2, there are other factors directing gold price. 2 top ECB policymakers warned about the risks of currency wars ECB Governing Council member Mario Draghi said that 'current account imbalances are widening again, free floating currencies are suffering from (government currency interventions), divergent policies and consequent speculative tensions. The global recovery itself is at risk'. His views were shared by Axel Weber who said 'it is a well-known fact that more flexible exchange rate regimes would help redirect growth from export to stronger domestic demand' and 'Market-oriented exchange rates that reflect underlying economic fundamentals contribute to global economic stability'.
Meanwhile, the IMF said emerging economies should appreciate their currencies to ease currency tensions while the dollar is 'on the strong side' relative to US economic performance. In our opinion, there's long way to go before advanced and emerging economies resolve currency tensions and the situation is positive for gold.
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Concerning dataflow, US GDP probably grew +2.2% q/q in 3Q10 after a +1.7% expansion in the prior quarter. Chicago PMI is expected to have slipped to 58 in October from 60.4 while University of Michigan Confidence revised up to 68 from 67.9 in October.
