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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FX winner & losers as central banks ponder retreat from QE

The US Federal Reserve is debating shrinking its USD 4.5tn balance sheet, ie reversing quantitative easing, in what could mark the start of monetary policy normalisation across the major currencies setting the scene for a new round of winners and losers.

It’s been a long time in coming, but the Fed is talking about starting to reduce its holdings of bonds accumulated from its crisis-era quantitative easing. Meanwhile, there are signs that Sweden may slow its QE programme, the European Central Bank’s QE programme may also be living on borrowed time and the Bank of England, as circumstances stand at the moment, is unlikely to renew its GBP 60bn QE programme once it is finished probably no later than May 2017.

The fact that a return to normalisation is being discussed at all is good news – it shows economies are moving away from crisis conditions. In this environment risk currencies should become more favoured ie AUD, NZD and some emerging market FXs along with those with higher yields whilst the safe havens, such as JPY and CHF should lose ground.

The USD should be a major beneficiary, and its rally may yet be rekindled, as the Fed is normalising its monetary policy ahead of the rest. However, with doubts over President Donald Trump being able to unleash very simulative growth policies – it could tread water a while longer.

Indeed, Trump is starting to sound and act more like a conventional US President. There’s the missile strikes against Syria with the familiar ruffling of Russian feathers, dialling down on anti-EU rhetoric and he even managed to conduct harmonious talks with China’s President Xi Jinping.

That’s the good news – now for the caveats:

The Eurozone seems to be stuck in perpetual crisis with difficult elections looming, rising political extremism, concerns over Italy’s banking system and the Greek debt situation remains unsustainable. And though the Eurozone is growing at the moment, there’s some debate over how dependent that is on ECB stimulus. What happens when it is withdrawn?

With the UK, the effect of leaving the EU, still isn’t known, though heavily speculated about.

The USD should be a major beneficiary, and its rally may yet be rekindled, as the Fed is normalising its monetary policy ahead of the rest. However, with doubts over President Donald Trump being able to unleash very simulative growth policies – it could tread water a while longer.

Indeed, Trump is starting to sound and act more like a conventional US President. There’s the missile strikes against Syria with the familiar ruffling of Russian feathers, dialling down on anti-EU rhetoric and he even managed to conduct harmonious talks with China’s President Xi Jinping.

That’s the good news – now for the caveats:

The Eurozone seems to be stuck in perpetual crisis with difficult elections looming, rising political extremism, concerns over Italy’s banking system and the Greek debt situation remains unsustainable. And though the Eurozone is growing at the moment, there’s some debate over how dependent that is on ECB stimulus. What happens when it is withdrawn?

With the UK, the effect of leaving the EU, still isn’t known, though heavily speculated about.

If it goes badly, the Bank of England could be forced to resume QE. Any return to a full-blown Eurozone crisis would also see the ECB and central banks in some neighbouring countries stepping up their stimulus programmes.

Those risk factors are constant negatives for EUR and GBP.

However, these are still early days and many of these risk currencies have had a good run against the USD. The real scope for gains, if central banks really are moving towards normalising monetary policy, is for the likes of AUD etc … versus JPY and CHF and possibly GBP due to Brexit concerns.

 

TECHNICAL ANALYSIS: EUR/USD heading towards ‘tough’ support levels

Support levels around 1.0600 on EUR/USD have steadily been giving away potentially setting the scene for a move down to around 1.0500. However, unless there’s a major pollical or economic catalyst, further downside for the pair is likely to be limited, particularly with very strong support clustered around 1.0000-1.0300. Therefore, this trade – selling EUR/USD may not yield a lot more profit and could become riskier for shorts.

The dailies are below the 200- and 50-day moving averages (which gave a sell signal back in late October 2016), however, the pair have hit the lower Bollinger band, suggesting the current fall could stall sometime this week, at least temporarily.

Support can be seen at 1.0575, 1.0540, 1.0507 and 1.0439. Resistance is around 1.0645, 1.0678-0 and 1.0765.

 

By Justin Pugsley, Markets Analyst, MahiFX

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