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QE3 vs. a Grexit

Friday, 8 Jun 2012 | 4:32 PM ET
Darren Robb | Getty Images

In a tug of war between quantitative easing in the U.S. and a Greek exit from the euro zone, which would move the euro more?

It's been a week of relatively good news for the euro, but talk of a Greek exit from the euro zone is hardly dead — and that or more economic weakness could still spur another round of quantitative easing in the U.S.

Greg Anderson, a currency strategist at Citigroup, decided to try and figure out whether an easing move could blunt the impact of Greek departure from the common currency.

Looking at past rounds of quantitative easing, he found that "during the time span of QE1, EURUSD rose from 1.26 (the day before announcement) to as high as 1.52 (December 2009)," he wrote in a note to clients. QE2 had a smaller effect — a move from 1.27 to 1.49 by the end of the round of easing — but it was still sizable.

Part of the move, Anderson says, was due to the "reserve recycling channel" — the fact that when the Fed started buying all those bonds, global markets rallied and emerging market central banks had to intervene and buy euros as part of their efforts to keep their own currencies in check.

"We are very skeptical that the same magnitude of intervention and reserve recycling in to EUR would occur if QE3 were accompanied by Gr€xit," Anderson says.

It's harder to tell what might happen if Greece exits, since nothing quite like it has happened before. But Anderson notes that during the first and second Greek crisis and Ireland's implosion, "EURUSD fell by 18, 13 and 12 big figures, respectively," and those were just scares rather than actual defaults or exits.

All in all, Anderson says, an orderly Greek exit could be more than offset by large scale quantitative easing. However, "a worst-case disorderly Gr€xit scenario leads to a much bigger effect than Fed QE even making optimistic assumptions about QEs effectiveness. If it is ineffective and perceived as pushing on a string the risk is that the QE impact will be dwarfed, especially initially."

Watch out.

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