The QE myth

The QE myth

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 17th of October.

The quantitative easing measures announced on both sides of the Atlantic have clearly failed to work. The stimulus that is needed, as outlined by both the ECB and the Fed, to restore full employment is a fiscal stimulus.

In traditional economics, excess liquidity results in more lending to consumers and investors, there by stimulating demand and employment. But in a country like Spain where capital flight has taken place on an unprecedented level, just increasing liquidity won’t work.

In the US the problem is different. The smaller banks that primarily lend to small and medium sized businesses have been left out of the safety net and billions have been spent to prop up mega banks. But lending would have been hampered even if the smaller banks were rescued. After all, banks accept real-estate for collateral-based lending and most real-estate is still down significantly from pre-crisis levels. If one considers the excess capacity in the real-estate market, low interest rates are unlikely to revive prices any time soon. Also recent reports suggest few of the benefits of lower rates are filtering to homeowners and the big banks are the actual beneficiaries.

Some argue fresh liquidity will cause inflation due to commodity boom and will act as taxes on Europe and the US. Low interest rates will encourage firms to spend capital on automation, making sure job growth remains modest when recovery takes place. Europe’s austerity measures without an accompanying growth model are akin to loss of blood; the patient must risk death before receiving treatment. There’s further risk to Europe. If the ECB worries too much over inflation while the Fed tries to revive the US economy, exchange rate differentials will result in a stronger euro, thus undermining the region’s competitiveness.

By announcing that interest rates will remain low through mid-2015, the Fed has indicated that it doesn’t expect a recovery soon. The sooner leaders across the Atlantic acknowledge that, the better.


GBP/EURO – 1.2306
GBP/US$ – 1.6132
GBP/CHF – 1.4894
GBP/CAN$ – 1.5906
GBP/AUS$ – 1.5641
GBP/ZAR – 13.9812
GBP/JPY – 127.02
GBP/HKD – 12.4981
GBP/NZD – 1.9732
GBP/SEK – 10.6321

EUR: The single-currency traded higher against most of its rivals yesterday after the German ZEW economic sentiments index showed marked improvement in October and the chatter over an impending Spain bailout request got louder. Risk appetite got a further boost after media reports suggested Germany has lowered its opposition to Madrid seeking a full-fledged bailout while two lawmakers from Merkel’s ruling coalition said Madrid should seek precautionary credit line from the ESM. The euro got further support as ratings agency’s Moody’s left Spain’s credit rating unchanged at Baa3, but changed outlook to negative. Euro gained the most against the pound with the GBP/EUR pair plunging to a four month low of 1.2290. The economic data calendar remains light on the ground today. Markets however will stay focused on the EU summit meeting scheduled to start tomorrow in Brussels.

USD: The US dollar eased against most of its peers yesterday after US production activity expanded more than expected in September amid media reports suggesting Germany may back down over its opposition to Madrid seeking a full-fledged bailout from the EU. Also Moody’s continuing with the current Spanish credit rating rather than following S&P in downgrading Spain seems to worked in favour of the common currency. The greenback witnessed a near sell out with the EUR/USD pair breaching the 1.30 level to touch a high of 1.3140. Cable also gained traction against the dollar overnight and the latest unemployment reading that showed UK jobless rate dropped to 7.9 percent against the estimated 8.1 percent has come as a relief. We have the housing data due from the other side of the pond later today and the USD may ease further if housing shows improvement.

Have a great day!


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