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Source: Thinkstock
For market observers next Thursday's meeting of the US Federal Reserve can't come soon enough.
For the last six weeks or so, markets have been completely obsessed by the prospect of a second round of Quantitative Easing (QE2) or so called money printing by the US Federal Reserve.
Just to recap: the first round of QE was implemented during the height of the financial crisis and it involved the US Fed creating new credit on its balance sheet, so it could buy billions of dollars worth of US government treasury bonds.
This created extra demand in the bond market and helped bring down longer term interest rates.
Given the continued weakness of the US economy and the high unemployment rate, traders have now convinced themselves that this second round of money printing is a foregone conclusion.
As a result they have bailed out of the greenback and instead poured into stocks, commodities or commodity based currencies like the Australian and New Zealand dollars.
This trade has become a default position for the markets - albeit occasionally interrupted by small bouts of US dollar buying - which is usually based on some speculative news report calling into question the US Fed money printing.
We saw a case of this during the week when a Wall Street Journal article signalled the easing might only be in the hundreds of billions as opposed to the trillions!
Given the Journal has apparently been used in the past by the Fed to soften the market up for pending announcements, it sparked an immediate sell off of stocks and commodities.
The kiwi dollar shed a cent or so in quick time.
However within 24 hours the default position was back in play and it was onwards and upwards for the kiwi again at least.
Clarity coming
This Thursday our time we should finally get some clarity on the issue and hopefully markets can then put a bit more focus on the fundamental strengths and weakness of the global economy.
How markets react to the Fed announcement on Thursday will be fascinating.
For the Fed not to print more money is almost unthinkable now and would surely spark a major market correction.
The big question is just how big the QE2 is? A package totalling 200 billion dollars could disappoint, while anything in the trillions could spark a further rally. Who knows?
You can catch the announcement live on NZI Business on Thursday morning.
It's been a while since we've had an announcement with this much potential to move the market, so it will be interesting viewing throughout the morning.
Meanwhile not to be overlooked in New Zealand this coming week is the release of the September quarter unemployment statistics.
This will be fascinating too as the last two quarters have proved very volatile.
After a big drop in the rate in the March quarter, the rate spiked from 6 to 6.8% in the June quarter.
Another increase of this magnitude would be a severe blow to confidence at a time when it is already weak.
However for the record Westpac economists are actually picking a slight improvement in the rate to 6.7%.
But as we have seen with the past two releases when it comes to reading employment numbers, its best to expect the unexpected.
