A few have asked where does the Yen fit into QE2. We will start with the easy part (only joking)……USD/JPY. Lets look at it from the Dollars perspective and as one TV analyst put it this week… “it’s all about the dollar.” With “shock and awe” you would expect USD/JPY to be sold and sold hard. Hard to disagree but the flip-side is if the QE2 amount is big, US Treasury yields may not go down – remember long US bond yields and USD/JPY remain a strong correlation. It also may imply a race to the bottom (currency war theme) and Japan announces their own QE program. Note at yesterdays BOJ meeting they bought forward their next meeting to a day after the Fed meeting – very strange indeed.
On the crosses it will be messy – I have no strong opinion other than stay out until the dust settles.