It’s been 2 weeks since the entire world sat down on a keg of gun-powder. First everybody waited for August 2nd – the X-day – when Barack Obama could have announced a technical default of the world’s biggest economy. Fortunately, the Congress and Obama’s administration agreed to lift the federal debt limit. Shortly after that relief the world was hit with another blow: Standard & Poor’s downgraded the US credit rating from AAA down to AA+, with a negative forecast. It was fairly wise of the rating agency to announce its decision on Friday, thus giving markets a weekend to recover after the shocking news and to try to get ready for the consequences.
Traders started this trading week waiting for the Fed Reserve’s meeting, which was to answer the question: What the USA is going to do next?
Mixed market reaction:
The analysts of Mig Bank say that markets were puzzled: some of them collapsed, others rallied:
· Crude oil. On August 9th oil prices declined below the psychological level of $ 80/b. In New York a barrel of oil cost $79,30.
· Gold rallied and hit new a new price record probably because traders and investors considered it to be the only save haven asset. On August 9th the December futures gained 1.7%, thus reaching $1743/oz (on Monday the futures gained 3.7%). Both mining and consulting companies reconsidered their forecasts for gold for the end of 2011. Zijin Mining (a Chinese mining company) lifted it up to $1900/oz, Merrill Lynch (a US bank) - up to $ 2000/oz.
· Currencies. The Russian Ruble lost a bit of its value while the Chinese Yuan strengthened against the US Dollar 6,412 from up to 6,417.
On August 10th the trends suddenly reversed:
· Crude oil rallied and exceeded the level of $ 82/b for WTI.
· The Russian Ruble started recovering.
· Asian and European stock markets started recovering as well.
According to the experts of :
· European indexes suspended their rally after the news about shelling at the demarcation line between South and North Koreas. The Governor of the Bank of Ireland added fuel to the fire by informing the world about the difficulties in the recovery of Ireland’s economy.
· The IEA downgraded its forecast for an increase in the global demand for crude oil, thus suspending the rally of oil prices.
Possible solutions for the US:
The experts of say that the Fed Reserve could have done the following:
· QE3. Numerous experts were saying that the FRS was about to start another round of quantitative easing.
· Interest rate increase. The current interest rates (0-0,25%) don’t let the US economy self-purify by making weak businesses go bankrupt and consequently cannot initiate further economic growth. Moreover, Bernanke promised to not change the key interest rate within the next 2 years.
As we can see nothing was done. Everything goes as if there was no threat of default or no rating cut. But something has to be done. Probably the only way out for the US is to print more dollars, which will help to the US authorities to put most of their problems to the shoulders of other countries.
Is it really the only way out?
Obama’s administration just cannot let the US economy collapse - in 2012 the US will hold presidential election. No politician can let the economy collapse (thus affecting the quality of life in the country) in the run-up to the elections. It is like a political suicide.
The US authorities know only one sure method to support the country’s economy – emission of money. According to Mig Bank, the current credit multiplier (the ratio between М3 and М0) is equal to 5. It means that every newly-printed dollar will cause a $5 increase in the money supply. In 2008 the multiplier was equal to 17.
However, emission is a temporary solution. Any short-term strengthening will be followed by a sharper and more considerable decline.
A couple of days ago Alan Greenspan, the former Chairman of the Federal Reserve, said: “The United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”
According to the Department of Masterforex-V trading system , the futures of the USD index is in a price range of Daily wave level after the formation of wave A Daily 2. The direction in which the price comes out of the range will determine the direction of the following trend.
If the upper border is broken there will be a bullish FZR of Daily 2. If the local low (73,58) is broken the price will form a bearish FZR of Daily with a chance of updating the historical low (72,86).
Market Leader and would appreciate it if you could participate in a survey. Please, visit the Academy’s forum and answer the question given below:
Will the US Dollar be devalued in near-term perspective?
· Yes, it will
· No, it won’t
