UPDATE 1-COLUMN-Curve steepeners the easy call post-FOMC

(Duncan Balsbaugh is a senior Treasury market analyst for
IFR Markets and Kevin Weir is a foreign exchange market (Read more about international currency trading. ) analyst
for Reuters. The opinions expressed are their own)

(Rewrites throughout)

BOSTON, Nov 3 (BestGrowthStock) – The stock and currency markets’
initial takeaway from the Fed’s QEII announcement was
confusion.

The bond market, meanwhile, picked up on the nuance that
the 35 percent limit on Fed holdings of individual issues had
been placed on hiatus. That was enough to generate large scale
selling of Treasury bonds, and buying of notes.

Given that the $600 billion to be purchased represents a
base, and can be expanded as deemed necessary, steepening
trades, involving purchases of notes and sales of bonds, seem
likely to continue to be popular.

The outlook for currencies and equities is less clear. The
Fed’s move is designed to increase the money supply and
generate a degree of inflation, even if it is not obvious that
the tool is the appropriate one to spur employment growth.

Under the circumstances, the dollar can be expected to
weaken over time, and there is no reason to believe that the
Fed and Treasury would be displeased by a devaluation that is
sufficiently slow and steady to avoid unpleasant attention.

It’s possible that the forex market (Read more about the difference between the forex market and the stock market. ), without holding a
convention or even taking a vote, will decide tomorrow that
bond spreads in Europe are the only inputs worth caring about,
and only the dollar is worth owning.

Over time, it seems difficult to bet against the Fed’s
ability to generate a dollar decline, particularly one
supported by a number of fundamentals. Owning currencies such
as the Aussie (AUD=: ) with interest rates that are trending
higher seems a reasonable bet if care is taken with entries,
and in general currencies levered to Chinese growth appear
likely to outperform.

By the same token, the stocks of companies that have sizable
export businesses are likely to prosper as the dollar weakens,
and companies that can take advantage of low long-term rates
will have an edge.

Commodities generally benefit in a weaker-dollar
environment, somewhat offset to some extent by U.S. economic
woes. Those who are trading commodities are in consequence
likely to keep a very close eye on China as the driver of
demand at the margin.

Given the political implications of the Fed’s move and of
currency fluctuations, making predictions about the future, as
Yogi Berra famously put it, is unusually difficult.

Still, when the central bank of a reserve currency proceeds
on a course that is likely to weaken said currency, it seems
the better part of valor to go with it.

Although prices were mixed in the hours following the
announcement, the trades put on in anticipation – long
steepeners, short dollars, long commodities, long equities –
seem generally correct, with long equities perhaps the most
problematic due to the plethora of factors and investment
strategies in equity valuation. As always, a degree of patience
when looking to enter trades may be helpful.

UPDATE 1-COLUMN-Curve steepeners the easy call post-FOMC