Fed Buying Treasuries, $UUP (US Dollar ETF) Broke Down, 5,000 April 25 Puts Open

Thursday, March 19, 2009

Fed Buying Treasuries, $UUP (US Dollar ETF) Broke Down, 5,000 April 25 Puts Open

It looks like the $USD might not be a pink dolphin/black swan after all. Not yet at least. The USD and real assets could be starting to price in the global stimulus effort, monetary dilution, the re-emergence of risk and a commodity bid (comparing USD:Oil next post). Earlier in March the US Dollar re-tested and failed to break through the November highs and has had an inverse relationship with the the market and commodities. After a massive rally the market is up against resistance which could cause a reversal in the USD. Eventually it could brush up against 50 day resistance and decide it's TRUE structural fate.

Today's Fed statement forcefully broke down the US Dollar Index. The Fed will print money to buy $300 billion long dated U.S Treasuries, $750 billion agency-MBS, $100-200 billion agency debt. The robots at the Fed vault will be working over time.

Release Date: March 18, 2009

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments (Federalreserve.gov)

The U.S Dollar Index and $UUP (Bullish USD ETF) broke below their 50 day moving average with volume and are probably ready to test the 200 day (*if other central bank factors DON'T decide to ruin their currency). Analysts were predicting a USD sell off IF the Fed decided to scoop up US Treasuries. Last time it broke the 50 day it had a big move to the downside however retraced to retest old highs. Yesterday at 10:00am 5,000 $UUP April $25 Puts traded pre Fed announcement at 0.25. Less any hedging activity, if those puts were bought it allows the trader to profit if the underlying gets exercised < $24.75 with the ability to sell 500k shares at $25.. The price on the .UUPPE is already up 140% to 0.60 unrealized. This morning by 11:34am the $UUP hit a low of $24.80 and the 200 day ma stood at $24.65. Charts are below. It's also interesting via barchart.com that $USDX futures call/put premium ratios are widening going out until May. (April: 0.36, May: 0.31). Also look at the big monetary base and reserve balance spikes during the crisis (via St. Louis Fed). $TIP (iShares TIP Fund) also spiked and the yield curve is steep. Watch out for creeping inflation once private equity starts scooping up the big banks.

UUP (US Dollar Bullish ETF) Chart (Stockcharts.com)

UUP (.UUPPE) April 25 Put (Optionsxpress.com)

Reserve Balances w/ Federal Reserve Banks (St. Louis Fed)

Monetary Base (St. Louis Fed)

Regarding M2 below via St. Louis Fed, once lending rebounds and the velocity of money multiplies through the system hopefully Bernanke can unwind lending programs in time.

Release Date: March 18, 2009

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments (Federalreserve.gov)

UUP (.UUPPE) April 25 Put (Optionsxpress.com)

Reserve Balances w/ Federal Reserve Banks (St. Louis Fed)

Monetary Base (St. Louis Fed)

Regarding M2 below via St. Louis Fed, once lending rebounds and the velocity of money multiplies through the system hopefully Bernanke can unwind lending programs in time.