It’s about that time when the smart money is beginning to think 10 moves ahead in the chess game. And in this game, the only piece worth focusing on is QE2. QE2 ends on June 30th and traders are already jockeying for position. How soon will the QE2 trade end? No one can tell. It could be a sell in May or it could be a sell the news. But one thing will be very clear when it occurs – the US dollar will stage a counter-trend rally.
One of the primary fuels during this speculative fervor has been the decline of the dollar. With the exception of a brief period in November no sector has benefited more than commodities. As I have previously discussed, this hasn’t generated some great economic benefit for the United States (that wasn’t already occurring), but it most certainly has translated into speculative behavior.
The dollar’s decline was relatively benign until the ECB began forecasting rate hikes earlier this year. And the usual inverse correlation can be seen in a sizable Euro rally. The end of QE2 will be seen as a pseudo form of tightening and a step in the direction towards US rate hikes. This could be an excuse for short covering and a USD rally. And while that doesn’t necessarily mean the commodity bull market is over it is likely to put a dent in the QE2 trade.
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