Home QExit talk is overdone, but USD rally likely for time

QExit talk is overdone, but USD rally likely for time

Ben Bernanke reiterated on Wednesday plans to slowly wind down the US Federal Reserve’s quantitative easing programme, which the markets seem to be increasingly treating as a given. However, it’s far from certain that QE will end and could be quickly reintroduced even if it is stopped.

But for as long as the forex markets buy into the QExit theme the impact on USD is likely to remain bullish, a trend that could last months, if not until the end of the year when the tapering off is due to kick in, by which time it would have probably been discounted.

By Justin Pugsley, Markets Analyst MahiFX.  Follow MahiFX on twitter at:  https://twitter.com/MahiFX

However, if QE is the fuel for the US economic recovery then the suggested timing of its withdrawal is strange. There have been improvements in US real estate prices and consumer demand is holding up relatively well, but a steroid injected monetary policy is only stimulating a relatively tepid economic recovery and mild inflation against a backdrop of heightened uncertainty.

As such there are considerable doubts as to whether the US economy can stand its withdrawal. Already, ‘real’ interest rates are starting to rise and the US government is also tightening fiscal policy.   Is the recovery really strong enough to absorb those sedative effects?

The forex markets should also pay attention to Bernanke’s statements that monetary policy will remain accommodative and that the pace of QExit depends on the performance of the economy. In other words the Fed is prepared to hit the accelerator again if necessary.

USD/EUR should rally on QExit hopes

USD EUR Should Rally on QExit talk June 2013

Easing currency war tensions

Nonetheless, talk of QExit could achieve two useful outcomes. A stronger USD diminishes currency war tensions and the recently stronger JPY, if sustained, also helps in that regard. If financial markets plummet around the world JPY is likely to remain steady as Japanese investors repatriate funds back home.

The second factor is that it will blow some of the froth off financial markets, particularly in the case of equities where the rally has been significant, despite lacking equally impressive earnings growth or the prospect of such.

From now and probably into a good part of 2014, QExit is likely to remain a key focus for forex markets. However, a major stock market and bonds slump and a stalling in US real estate prices will test the Fed’s resolve to end quantitative easing, which probably isn’t as strong as many in the markets think.

Justin Pugsley

Justin Pugsley

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice