If you're expecting new quantitative easing to really move the dollar, you could be disappointed, according to one strategist at a major bank.
Got your trade on for possible quantitative easing? That's nice — but don't get your hopes too high, says Steven Englander, global head of G10 foreign-exchange strategy for Citigroup.
Englander just sent a note to clients with the heading, "Why QE3 Impact May Fizzle." In his research, he argues that "the world outside the US is much less attractive now than in March 2009 or August 2010 when previous [rounds of easing] were announced." In other words, investors don't have as many attractive currencies to trade against the dollar.
At the same time, Englander says, the Federal Reserve's calculations of the benefits embedded in past rounds of easing are a bit confusing.
The central bank seem to be assuming that if its balance sheet stays the same size, then the benefits of new quantitative easing would be just as great as they were when the Fed initially poured money into the system.
Englander, however, argues that "most clients and traders feel that rates would back up significantly if the Fed were to stop expanding the balance sheet. In that world, subsequent rounds of QE just keep rates where they are rather than lower them and the cumulative benefits are much less pronounced."
In other words, if the Fed does in fact announce new quantitative easing, it could have a lot less effect than many investors expect.
True, the euro has had a nice run since Germany's top court blessed the bailout plan. Having said that, if you had a euro-dollar trade on Tuesday night you're probably sitting pretty. Yet the question now is: how much more will the dollar slide?
To be continued.
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