Fed’s tapering decision should support risk currencies for a

Fed’s tapering decision should support risk currencies for a

The US Federal Reserve bottled it on tapering its quantitative easing programme, which was positive news for risk currencies and risk assets and the relief will no doubt support rallies in these markets, but the Fed has merely kicked the can down the road.

Fears over the strength of the US recovery and worries about rising real interest rates – issues regularly highlighted in this column – swayed the Fed’s hand over tapering. Yet the markets had accepted as given a $10 billion reduction to $75 billion a month in its quantitative easing programme.

By Justin Pugsley, Markets Analyst MahiFX
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But for risk currencies such as GBP, AUD, NZD and emerging market currencies the news should support relief rallies. Though looking over-bought on the RSI, GBP/USD could be set to regain levels of 1.6500-1700 with the UK housing market stirring and with brighter prospects for the economy, which for the time being are papering over the very large current account and budget deficits.

Gold, unsurprisingly, had a good day on the Fed’s announcement, but the upside could be limited in the short- to medium-term by factors such as brewing economic problems in China and India, which are both big buyers of the physical metal. Over the long-term, from the perspective of the charts, the trend still looks downward.

GBP/USD rallies – a good day for risk currencies

Tapering will probably be the next Fed Chairman/woman’s problem

But in the meantime, the Fed is continuing its massive quantitative easing programme at the same pace, which will continue to distort financial and commodity markets, whilst doing little to stimulate the real economy – if some recent research is to be believed.

However, the Fed will eventually have to end its QE policy as it risks fuelling financial bubbles and reckless risk taking and also has to recognise that its withdrawal will be disruptive to the markets it has so distorted. The longer that decision is delayed the harder it will be to withdraw.


Structural factors translate into lower economic growth

Consider that the US and other developed countries all face ageing populations, which means household consumption, the main growth driver will naturally decline. The other factor is technological disruption, which is destroying many traditional middle income jobs and putting downward pressure on wages. These are issues which society has to try and manage and cannot be solved by QE.

Developed countries likely face many years of low GDP growth due to these structural factors and leaving the markets to their own devices would eventually see very low interest rates and Treasury bond yields anyway as seen in Japan.

For the risk currencies, an upcoming flash point are the wrangles over the US deficit ceiling with various camps in the Republican and Democratic parties viscerally opposed to each others’ views making for another set of raucous negotiations with the potential to un-nerve markets. It’s likely that the Fed’s tapering decision was in part influenced by this.

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