Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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Fed Tapering Reinforces 'Bad News Is Good News' Rallies

The US Federal Reserve's desire to wind-down its quantitative easing programme has visibly changed the dynamics of the forex market with the focus now on when it will end. Bad economic news should therefore signal its continuation, which would be bullish for currencies trading against the USD.

Possibly unwisely the Fed signalled that it will probably end its quantitative easing programme around mid-2014. However, that is merely an estimate or a wish. In reality the end of QE is not down to a date in the calendar, but will be dictated by the pace of the US economic recovery, whether it is sustained and especially the rate of jobs creation.

In effect the stronger the recovery the more likely QE will end, which would for a while maintain significant downward pressure on equities, fixed income, commodities and risk currencies, but would be bullish for USD.

However, a sustained US recovery should at some point begin to lift commodity currencies, such as AUD, NZD and CAD, which have taken a battering on signs that the commodity super-cycle has reached exhaustion point with the juggernaut Chinese economy running out of steam.

EUR/USD vulnerable to peripheral Eurozone bond yields

**Click image to enlarge

Monetary gulf opens between US and Europe

In contrast to the US, the Bank of England and the European Central Bank are dovish and see little reason to rein in their respective easy monetary policies signalling that the era of low interest rates is far from over in Europe.

However, the potential end of the Fed's QE programme could expose the Eurozone's deep structural flaws as the tide of liquidity pulls out. Portugal is suffering political chaos as it faces austerity fatigue and much of the continent remains mired in deep recession, which threatens political and social stability.

The rising yields on US, UK and German government bonds generated by the Fed's new policy stance could quickly translate into un-sustainably high yields on peripheral Eurozone countries' debt meaning they may not be able to fund themselves. That would be very bearish for EUR/USD and GBP/USD.

It would also leave the ECB and its limited tool set with difficult choices for bringing down the cost of funding for struggling peripheral Eurozone economies. It would certainly require the use of its Outright Monetary Transactions programme, which comes with conditions such the beneficiary countries pursuing austerity type policies in exchange for the ECB supporting their bond markets.

The era of easy money is far from over and the big question is whether or not the US has got ahead of itself by calling time on its QE programme. The US jobs numbers due out later today should provide some clues.

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