The UK may have led the way with quantitative easing (QE), but no-one can accuse the US Fed of having faint hearts; after drastically reducing interest rates to near zero, they've not only announced the start of $305bn worth of QE, but also started it. Like the BoE, the Fed have been buying mortgage backed securities for a while, and they announced that this will continue with even more money pumped in, however this doesn't create any new money as they issue new government backed securities to pay for the purchase, essentially replacing private securities with government ones, the $305bn QE is going to be spent on buying government securities back from the market, essentially buying back government debt with money that didn't previously exist. Just like the announcement from BoE weakened Sterling, the Fed's has sent the Dollar tumbling; Sterling has managed to climb briefly above 1.43, and the Dollar has also fallen against the Aussie Dollar which has climbed to above 0.68, while the Euro has jumped a massive 5c to around 1.35.
The Pounds rise against the Dollar was relatively muted due to it's own QE measures, and yesterday morning's unemployment figures. The papers have been full of doom and gloom over the figures, as if a rise above 2m was an unexpected disaster, but with the recession nowhere near an end as of yet, the unemployment rate was also going to rise above this level sooner or later. The actual rise in the numbers was as much to do with an increase in the size of the labour pool looking for work, than those losing their jobs, although with a decrease in the number of vacancies as well as average earnings growth slowing, their is little comfort in this. As the Pound rose by less against the Dollar, than did the Euro, The GBP/EUR rate was always going to suffer, and it duly did falling below 1.0550, before recovering to sit around 1.06 in this morning's trading.
QE measures have now sent both the Pound and the Dollar much lower in the markets, the Swiss Franc has been deliberately weakened, leaving only the Yen and the Euro as the last two of the big five currencies not been intentionally, or 'accidentally' devalued. The Yen itself has been falling as the Japanese currency crumbles. This leaves the Euro as the strongest remaining currency, which is not something the ECB wants, however with their reluctance to cut interest rates below 1%, it is doubtful whether they have the stomach for QE measures that would bring their currency down in line. The economic fundamentals, so not support the Euro at such elevated levels, and there is little doubt that the Euro is overvalued; over the longer term the euro almost certain to start to drop back, however these levels do provide a very good chance for exporters to Europe to cover any ongoing exposure they do have.
There is little data to compete with yesterday's announcement today, with UK budget deficit the highest on record, hardly a surprise, and mortgage lending falling once again in February. The markets will still be reeling from yesterday's shock announcement from the Fed, and it may take some time for the markets to settle and find a direction. One outcome from the Fed QE measures will be to remove the safe haven status of the US Dollar, this has had the effect of making Gold much more desirable, with the price going up to above $940/oz, and it is likely to stay up there until the markets find somewhere else they consider safe to place their funds.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital