Home The “Twist” has done its work – expect fresh QE

The “Twist” has done its work – expect fresh QE

In order to  continue moving towards a “substantial improvement” in employment, the Fed will likely opt for more outright purchases, after Operation Twist has done its work, says Simon Smith of FxPro.

In the interview below, Smith also discusses the yen after the Japanese elections, the dangers of trading the fiscal cliff during the holiday season and other topics that move currencies.

Simon has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining  FxPro  in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital.
He has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International.
Simon holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

1. Do you think that the Fed will announce more easing this time? Will it be in the form for an extended ‘twist’ or an expansion of QE3 into treasuries (aka QE-Infinity)?

Outright purchases look the better route. Twist has done its work, doubling the Fed’s holdings of bonds of 10 years maturity or more and ensuring the largest maturity segment is of 5-10 years. It will need to continue with modest monthly Treasury purchases to sustain the momentum which is required to move towards its stated aim of seeking a “substantial” improvement in the labour market.

2. Assuming the talks around the fiscal cliff continue into the holiday season, would the combination of low liquidity and ongoing news flow from Washington provide opportunities to forex traders? Or might conditions be too risky?

There are always opportunities, but low liquidity can make conditions a little more treacherous and price moves more exaggerated. The key is not to trade for the sake of it, just to hold your nerve, keep your eyes on the charts and stick to your strategy.

3. Japan’s upcoming elections on December 16th – the prospects of a victory for the LDP and its ambitious monetary and fiscal programs – have already weighed on the yen. Has the market gone too far already? Or is a victory for Abe’s party likely to trigger another big JPY sell-off?

At present, I think it’s pretty much in the price. For the yen, the actual result will be less important but the extent to which it sees signs that the LDP can and will follow through on the more expansionary tack that it has talked about. There have been plenty of new leaders in Japan that have promised much and delivered little. Markets will be right to expect the same here until they see decent evidence to the contrary.

4. European debt-crisis: Berlusconi and Italy return to centre-stage, as do rising Italian yields. At what level of yields and/or spreads between Italian and German bonds would Italy need to seek aid for funding itself?

Well, the 7% level is often banded around and that has become the psychological inflexion point for markets. Whilst you can go through the re-funding maths, it does come down to market faith in whether the country will achieve the growth required to keep debt on a sustainable footing. Italy’s growth record 1999-2008 was pitiful and markets are right to expect a return of Berlusconi to lead to a derailing of the reform process.

5. Fresh trade data from China shows disappointing imports and exports. Is this a warning sign for the Aussie that has been quite strong to date?

Currencies are of course a relative game. Whilst it remains a commodity currency, the Aussie has become less intertwined with the global economic cycle and China, benefitting from central bank reserve-diversification and solid sovereign fundamentals, certainly in comparison with many other countries. All in all, it’s held up relatively well over the past month, given the headwinds from China and also uncertainties from the US.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.