Traders Uneasy over QE3 Impact

on Sep 28, 2012
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While the news for a third round of quantitative easing by the US Federal Reserve is seen as generally benefitting markets, such as the stock market or the gold market, foreign exchange traders seem uneasy about the long-term impact of QE3. On 26 September 2012, the Financial Times published an article exploring the concerns of forex traders that the much anticipated Fed action might have triggered another clash of the “currency wars”.

The FT reports that following the Fed announcement, fund managers have been rethinking their portfolios in the belief that the Fed’s open-ended programme for purchasing more mortgage-backed securities will weaken the dollar and cause sharp gains in emerging market currencies. This in turn is likely to cause central banks to intervene so as to avoid unwanted strengthening of local currencies.

!m[](/uploads/story/484/thumbs/pic1_inline.png)And while central banks so far have not taken up such a resolute stance as the Swiss National Bank as regards the franc’s appreciation against the euro, the forex traders’ fears are hardly ill-grounded. Shortly after the Fed announcement, the Bank of Japan launched its own monetary easing programme intended to counter deflation and stimulate growth which was feared could be severely impacted if the Yen became too strong against currencies weakened by US and EU easing tactics. At the time of the BOJ announcement, Bloomberg quoted Izuro Kato, chief market economist at Totan Research Co. who pointed out that there was a competition for loosening monetary policies around the world.

In addition, on September 21, Bloomberg reported that Brazil’s government was also determined to defend the real, quoting the country’s finance minister Guido Mantega who noted that the Fed’s new round of monetary easing had stimulated the currency war. “The currency war is a reality that is used by various countries,” Mr Mantega pointed out, adding that the Brazilian government was not going to permit a loss of competitiveness. Since the Fed announced QE3, Brazil’s central bank has repeatedly intervened to weaken the local currency and protect the competitiveness of the country’s industry.

The FT notes that some investors are allocating money toward countries with beaten-up currencies such as Russia or India. Clive Dennis, head of currencies at Schroders (LON:SDR) notes that both Russia and India’s currencies pose less intervention risk on account of strong rate support and levels well below their best performance of the previous year. “I like owning those currencies in a US QE3 environment,” notes Mr Dennis, as quoted by the FT.

Other investors are taking a different approach and look at countries whose banks do not have a history of frequent monetary intervention. Investment managers Amundi and Baring Asset Management for instance are avoiding the Brazilian real and are buying the Mexican peso instead, since Mexico’s central bank has indicated that it is happy for the currency to appreciate further. “Mexico is an emerging market currency many managers like as they believe the central bank won’t intervene. The Singapore dollar and the Russian rouble are managed by a range, instead of one-way direction, and are also good candidates for QE-play”, notes Amundi’s James Kwok, as quoted by the FT.

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