A Bit More Detail On QE & Currency Prices
Quantitative Easing can have a massive impact on currency valuation, find out how in this video.
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
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We have a question here from Gabriel asking how something like quantitative easing usually impacts currency prices in both the short-term, as well as the long-terms, thanks for the question.
Now, the short answer for this Gabriel is that QE usually shoot from a theoretical point of view, have a negative impact on the currency in both the short-term, as well as the long-term, and the reasons for those comes down to basic supply and demand dynamics.
So when a central bank performs quantitative easing, they're essentially pumping money into the system, right? So from a supply point of view, it means over supply versus demand, and that should see the value for.
But the dynamics of why it's negative for the currency at that point, also comes down to interest rates itself. So QE is considered as an unconventional monetary policy tool and is only deployed when lowering interest rates at the short-term on the short-term interest rates, doesn't have the desired effect in the economy.
So with the type of economic downturns we saw during the global financial crisis, and now during COVID-19, we've seen that lowering interest rates itself to stimulate growth in the economy, wasn't enough. Central banks had to do more to boost confidence in their economies.
Now usually lowering interest rates, makes cash cheaper, right? It lowers borrowing costs for individuals as well as companies which means credit is a lot cheaper and that normally incentivizes people and companies to buy lots of stuff they really want, but can't afford with money they borrow at lower rates from the banks.
Now, during these last two financial crashes we've had, lowering rates wasn't enough to do that. So the banks had to do more to stimulate the economy, to bold confidence by performing something like quantitative easing.
So it's not only from a money supply point of view, but it also creates confidence. And what they do, is they basically pump the market full of money, and remember that it's already cheaper money, due to interest rates already being lower.
Now, of course, there's other benefits to something like quantitative easing, such as keeping the back end of your curve, flatter or lower, basically keeping longer term interest rates lower for longer as well. And the reason why they wanna do that for example, is again, to try and instill confidence in what they're trying to do.
But the most important thing to take away is that, you know, in markets, it's never just one thing. It's not just QE or just tapering, there's always a range of factors that we need to keep track of because even though currency should weaken on QE and strengthen on QT or tapering, it doesn't always happen that way.
So the point I'm trying to make here is that yes QE is normally a negative in the short-term and the long-term for currency, but it's not always a negative depending on what else is going on in the global macro markets. That's why we always need to be in tune with the global macro themes, that's driving the markets at any given moment. Also remember that again, expectations drive the market.
So when markets anticipate QE or anticipate tapering, that can already be enough to start moving the currency up or down, depending on what the expectations are.
So when you see things like daily market operations, where a central bank buys bonds, but it's part of the, you know, ongoing or currently announced QE your program like, part of your question for the IBM Z's announcement earlier today, that type of thing isn't really gonna move the market because it's all new so to speak.
We already know they're in a bond buying program, so they're basically just buying the monthly or the daily amount or the weekly amount that they say they're gonna buy. When those type of daily operations will get the market's attention is when they suddenly stop buying for a month or two, and they don't tell us why, or they suddenly buy two or three or four or five times their regular amount, and they don't tell us why.
Those types of things will start to get the market's thinking. And, but as far as regular day operations are concerned, it's not really gonna be a big daily mover.
***For more detail watch the video or go to www.financialsource.co
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question here from Gabriel asking how something like quantitative easing usually impacts currency prices in both the short-term, as well as the long-terms, thanks for the question.
Now, the short answer for this Gabriel is that QE usually shoot from a theoretical point of view, have a negative impact on the currency in both the short-term, as well as the long-term, and the reasons for those comes down to basic supply and demand dynamics.
So when a central bank performs quantitative easing, they're essentially pumping money into the system, right? So from a supply point of view, it means over supply versus demand, and that should see the value for.
But the dynamics of why it's negative for the currency at that point, also comes down to interest rates itself. So QE is considered as an unconventional monetary policy tool and is only deployed when lowering interest rates at the short-term on the short-term interest rates, doesn't have the desired effect in the economy.
So with the type of economic downturns we saw during the global financial crisis, and now during COVID-19, we've seen that lowering interest rates itself to stimulate growth in the economy, wasn't enough. Central banks had to do more to boost confidence in their economies.
Now usually lowering interest rates, makes cash cheaper, right? It lowers borrowing costs for individuals as well as companies which means credit is a lot cheaper and that normally incentivizes people and companies to buy lots of stuff they really want, but can't afford with money they borrow at lower rates from the banks.
Now, during these last two financial crashes we've had, lowering rates wasn't enough to do that. So the banks had to do more to stimulate the economy, to bold confidence by performing something like quantitative easing.
So it's not only from a money supply point of view, but it also creates confidence. And what they do, is they basically pump the market full of money, and remember that it's already cheaper money, due to interest rates already being lower.
Now, of course, there's other benefits to something like quantitative easing, such as keeping the back end of your curve, flatter or lower, basically keeping longer term interest rates lower for longer as well. And the reason why they wanna do that for example, is again, to try and instill confidence in what they're trying to do.
But the most important thing to take away is that, you know, in markets, it's never just one thing. It's not just QE or just tapering, there's always a range of factors that we need to keep track of because even though currency should weaken on QE and strengthen on QT or tapering, it doesn't always happen that way.
So the point I'm trying to make here is that yes QE is normally a negative in the short-term and the long-term for currency, but it's not always a negative depending on what else is going on in the global macro markets. That's why we always need to be in tune with the global macro themes, that's driving the markets at any given moment. Also remember that again, expectations drive the market.
So when markets anticipate QE or anticipate tapering, that can already be enough to start moving the currency up or down, depending on what the expectations are.
So when you see things like daily market operations, where a central bank buys bonds, but it's part of the, you know, ongoing or currently announced QE your program like, part of your question for the IBM Z's announcement earlier today, that type of thing isn't really gonna move the market because it's all new so to speak.
We already know they're in a bond buying program, so they're basically just buying the monthly or the daily amount or the weekly amount that they say they're gonna buy. When those type of daily operations will get the market's attention is when they suddenly stop buying for a month or two, and they don't tell us why, or they suddenly buy two or three or four or five times their regular amount, and they don't tell us why.
Those types of things will start to get the market's thinking. And, but as far as regular day operations are concerned, it's not really gonna be a big daily mover.
***For more detail watch the video or go to www.financialsource.co
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
