Foreign exchange debate part two: The changing face of the foreign exchange market
Euromoney FX debate videos
Foreign exchange debate: Learn more about the panelists
|
|
EXECUTIVE SUMMARY
• US quantitative easing is fundamental to the FX market, driving the dollar down and other currencies up
• The difficulties faced by the EU in dealing with eurozone countries’ problems are intractable and FX market participants are concerned about this
• The central banks of most countries have limited ability to intervene successfully in the FX markets
• Regulators’ attempts to pull all trading on to exchanges are misguided when it comes to FX markets and there are limited opportunities to educate them on this
• Regulatory pressure for transparency is not necessarily a good thing: transparency does not necessarily breed market stability |
|
|
JK, Amundi The most important thing in the economic background to the foreign exchange market is that the Federal Reserve has started quantitative easing. It’s a very important signal because there’s not much that the bond market can continue to do to help in easing monetary conditions in the domestic US economy. The euro has already dropped to a very low level. So for the US quantitative easing to really work, to take effect, it has to work through other countries in the world. That’s why quantitative easing is driving the dollar down, and it will continue to go down. This will be a very important theme for many months. Even if some strong data might come later, I don’t think that strength will drive the dollar up because the effects of quantitative easing will last for many months. Thus I see the dollar going down, pushing other currencies up, forcing other central banks to cut interest rates. It’s very clear that the US authorities want the dollar to go down but it doesn’t necessarily mean that they want the other currencies to go up. What they really want is the other countries to share the burden of quantitative easing, which means that they want to force the other currencies to have appreciation pressure so that all the central banks in the world will cut interest rates and share in the inflationary burden. That’s what I think, and that’s why we can see finally, after the quantitative easing, that the main arena is gold; the gold price keeps on going higher, higher, higher, because that’s the only thing that’s out of this circle.
Sui Chung, Euromoney Richard, is that what you’re hearing from clients? Is that how the clients of UBS are looking at it, that QE II is what’s driving the sentiment? Or is there a broader variety of opinion?
RL, UBS As far as QE II is concerned, undoubtedly there is a view that it is what is weakening the dollar, and we have to say that something is driving it that way. I do share some of the views that James has expressed. Not least I’m minded of a meeting a while back in which our head of Japan economics in response to what clients thought about Japan said: "Why don’t we start by asking the clients what they think of the US because whatever they think of the US, if it’s good halve it for Japan, and if it’s bad double it.’ To some extent you could almost use that analogy for the entire world today. So to that extent the question of beggar thy neighbour is not particularly appropriate. It’s a question of the US doing what it needs to do for its own domestic concerns, given that the Fed does have that dual mandate of price stability and employment. If we’re all reliant on the US, we’re going to have to pay the price.
Sui Chung, Euromoney Martin, is this what you hear from the clients of Credit Suisse? Do you encounter similar sentiments?
MW, Credit Suisse It’s hard to construct a very bullish outlook for the dollar in this environment. There’s QE II and looking at the fundamentals it’s really difficult to see anything other than that. However, having said that, it’s all in the price. QE II was a long time ago now, and now it’s there and the dollar isn’t really going anywhere with its initial reaction. Probably we have to look differently. If you look at Europe, it’s back in the spotlight again. Europe needs to restructure; we believe there is almost no other choice than to restructure, and then if they do who’s next on the list after Greece and Ireland – Portugal, what about Spain? The euro has been fragile again and we will see it under immense pressure once more. But, as I said, it’s hard to construct a case for a much stronger dollar, but maybe collectively the market is wrong again.
Sui Chung, Euromoney Ian, from the trading side do you see some of those themes coming through? Martin mentioned that it’s all in the price now, so are people on the wrong side of it?
IOF, Deutsche Bank There seems to be an element of the market saying that governments have fallen behind the facts of the matter. Looking at the price action, that’s where it seems to have been led. The clear winner seems to be gold, as James said. There’s a clear trend there and that’s going to continue. If you look in Europe as well at the blow-out in some of the credit spreads, it’s done on very thin market conditions. There are continued concerns about Europe and it means that people are moving out their prices rather than things being blown out on any real strong volume, which is another difficulty.
