Saxo Bank Mar. 20 2009 : Market treads water - pondering tactical re-entry/follow up moves after FOMC induced earthquake.

Treacherous trading for rest of the day a possibility as recent market moves forced many traders' hands

After the earthquake of the last couple of days, markets seem to be wandering aimlessly here ahead of the weekend, not sure if they want to commit further to the large moves from the last couple of days in the wake of the aggressive new line from the Fed. This may give opportunities for those who missed the move to hop on board for at least one more surge in USD weakness heading into next week and then the G20 meeting the following weekend.

The furor over the AIG retention payouts shows the complete lack of understanding on the popular level about the entire crisis as Michael Lewis so aptly describes in his new column over on Bloomberg. The real issue that AIG sits at the center of is in fact the entire CDS market - which had ballooned to several multiples of the real entities it was designed to insure and had essentially become a casino-like playground of investment banks and hedge funds. US taxpayers should be irate that AIG created obligations out of thin air that must be then paid to other gamblers who took the other side of the bet and are the direct benefactors of AIG's (and now the taxpayer's) misery. Regardless, the popular anger has risen to such a degree that the Congress felt compelled to pass special legislation that attempts to specifically clawback such bonuses/retention payments paid to employees of any entity that receive public bailout funds.

US Treasury Secretary Geithner is under so much pressure on the AIG bonus issue and from previous missteps that many are speculating on his imminent resignation/replacement, though Obama appeared to strongly back up his secretary in an appearance yesterday - and any firing at this point in time would be a loud signal of weakness when the administration is already showing signs of struggling with the magnitude of this crisis. ("Crisis" is a terribly inadequate word, just as "Recession" Somebody - please give the current situation a name - should we call it Great Depression II (GD II) or the Credit Bubble Burst (CBB) or even the Great Ponzi Scheme Unwind (GPSU) ? . It's amazing that we haven't come up with a better moniker for this thing.)

Today, German Chancellor Merkel was out promising that the EU was ready to fund the IMF with EUR 75 billion for bailout funds. This is a prelude leading up to the G20 on April 2 in which we can expect some kind of coordinated attempt by the powers that be on international bailouts and broader agreements on other financial regulations.

The ECB's Weber is out just before we go to press with some dovish commentary - that the ECB will use its "room to move" on interest rates and that it may look to offer longer term loans on its refinancing operations to flatten the interbank yield curve. This kind of talk triggers the idea that the ECB is eventually forced down the path that the Fed, BoE and that there really is no winner in the competitive devaluation game if everyone eventually plays it (except for those long gold, one might say.)

Chart: USDJPY
USDJPY swooned on the Fed's dramatic new QE measures, which drove the all important longer treasury yields sharply lower, which is very important for USDJPY, which have slavishly tracked long date US yields for years. If the Fed's buying efforts manage to keep yields low, the pair may remain capped for now. Note the important old flatline support (blue line) and the line or resistance at which USDJPY is currently trading (the previous support)...