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3 May 2013
Forex Flash: Central banks mull ramifications of QE – BMO Capital Markets
FXstreet.com (Barcelona) - At the top of the macro economic "food chain" inside of the policy sphere, there remain two diametrically opposed paradigms at present, which we think are having an impact on FX markets in general, but for our purposes here the EUR. The Fed, BoE and BoJ have started with QE and will presumably over time wean themselves off of it.
The ECB has started without QE, and various developments suggest that, if anything, it is working its way towards it. According to Stephan Gallo at BMO, “This does not imply that the former will actually stop QE and the latter will start it, but these adjustments do leave room for the two sides to eventually meet somewhere in the middle.”
In addition, the EUR/USD is therefore tough trading at the moment: on the one hand as EMU policy softens further and the ECB moves towards the opposite end of the spectrum, peripheral spreads are boosting the EUR. On the other hand, once the flows related to narrower spreads and a stronger EUR are exhausted, persistent falls in rates across the bloc and across tenors essentially make the EUR an "ultra-low yielding currency", which could continue to be a profitable trade on the basis of growth and yield differentials alone - especially in relative value terms. “Short-term, we still believe that the EUR will ultimately head somewhat lower, as this trip for the ECB from the far right and towards the center of the spectrum will not happen all at once or persistently either.” Gallo adds.
The ECB has started without QE, and various developments suggest that, if anything, it is working its way towards it. According to Stephan Gallo at BMO, “This does not imply that the former will actually stop QE and the latter will start it, but these adjustments do leave room for the two sides to eventually meet somewhere in the middle.”
In addition, the EUR/USD is therefore tough trading at the moment: on the one hand as EMU policy softens further and the ECB moves towards the opposite end of the spectrum, peripheral spreads are boosting the EUR. On the other hand, once the flows related to narrower spreads and a stronger EUR are exhausted, persistent falls in rates across the bloc and across tenors essentially make the EUR an "ultra-low yielding currency", which could continue to be a profitable trade on the basis of growth and yield differentials alone - especially in relative value terms. “Short-term, we still believe that the EUR will ultimately head somewhat lower, as this trip for the ECB from the far right and towards the center of the spectrum will not happen all at once or persistently either.” Gallo adds.