I have been on the QE3 bandwagon for awhile, especially after the FOMC minutes and Jackson Hall.
Certainly, positioning for QE3 has been the right trade for the past month. Dollar shorts and gold longs have made money across the board (with the exception of AUD, which has had its own problems).
That said, it’s all about probabilities and I see a 20-25% chance that the Fed disappoints. So if you’re holding on to profits, think about lightening up.
If you’re flat, I don’t see a great reason to get involved until the decision is announced. I think QE3 is coming but the name of the game isn’t to be a hero, it’s to manage risk.
There will be plenty of time to make money after the decision.
If the Fed rolls out QE3, the dollar will get smoked, oil and gold will surge. The most straight-forward trade I see is short USD/CAD because Canada gets all the benefits of QE3 without any of the currency-devaluation. Technically, USD/CAD could hit 0.9400 in a week or so.
If the Fed doesn’t do QE3, the stock market will take a flying, crane-kick to the balls, exaggerating the rally in USD. I expect major volatility as the market tries to sort out the details. But I wouldn’t rush to pile on if you miss the first move because the market will bounce at some point before Bernanke speaks on hope that he will be dovish.
Overall, don’t fight the momentum.
No QE3, look for opportunities to buy USD; QE3, look for opportunities to sell. Stay nimble.
