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· US Fed talk on further QE
· US Congress initiate FX law, essentially to tariff Asian imports where currencies are fixed
· UK debate on a second round of QE
Market Overview:Over the last week the trend of USD weakness has extended, albeit at a slowing pace. Talk is now rampant about central bank bond buying activities, or Quantitative Easing (QE). This is essentially the printing of money to keep interest rates low, and therefore stimulate growth. If a country uses QE, they are attacking the value of their currency. When economies face periods of spluttering economic growth, such as many do at present, a weaker currency provides a country with an opportunity to export more goods and therefore hopefully kick start an “export led” economic recovery. The US Federal Reserve are now openly discussing strategies for the implementation of QE. This is the main driver for this USD weakness. The UK have also started to debate the merits of a second round of QE. Japan are still poised to intervene and again sell Yen to curb its strength. Brazil also acted to curb its currency strength.
Market conditions are certainly far from ordinary, with stock markets, bonds and gold all strengthening in price on the back of various QE initiatives.
Last week the EUR was the main beneficiary of USD weakness. The EUR strength is in the face of mixed economic data, further bank bailout and Govt Debt issues in Ireland, and rising civil unrest in many Eurozone countries, caused by almost across the board spending cuts by EU governments.
The AUD continued its rise against almost all currencies. This week provides increased focus on the AUD as the RBA will tomorrow announce whether or not they will again hike their cash rate. With the Asian Development Bank increasing its expectation on Asian annual growth from 7.5% to 8.2%, Australia is well placed to see demand remain high for its resources. However in terms of the interest rate outlook, a slowing Australian property market is pulling in the opposite direction.